For Retirees, a New Mortgage Presents Challenges
May 23, 2011 (The Philadelphia Inquirer) PHILADELPHIA - The road to retirement can be paved with good intentions - such as paying down the mortgage faster so that, by the last day on the job, your house really is all yours.
With millions of homeowners struggling to make even regular mortgage payments these days, an accelerated payoff goal may seem beyond reach. Yet many financial planners still advise debt-free retirement - including freedom from mortgage payments.
Why? So you'll require less income to support yourself during retirement, says certified public accountant and financial planner Jacquelyn M. Basso, of Jacquelyn M. Basso & Associates of Downingtown, Pa.
"You are on a fixed income, and earn less than when you worked, and cannot spend more than you make," she said of the typical retiree. "So removing the mortgage from the equation can make life easier."
Not all retirees have the vast assets that financial planners recommend to help make it through comfortably, though. And, Basso said, many retirees who want to downsize to smaller homes have found that they don't have as much equity as they thought to exchange their current homes for new ones.
These retirees are opting to take on new mortgages, rather than tap into savings or investments that might be needed over the long term.
Even then, Basso said, changes in the rules require borrowers to come up with bigger down payments - 20 percent rather than the zero percent of housing's boom times.
"That finds many taking what they need out of their nest eggs, the money they need to live on," she said.
Consider these questions beforehand, AARP recommends:
Will you be able to afford a new mortgage payment, as well as utilities, maintenance, and insurance on your home, after you retire, when your income will probably go down?
Will having a mortgage offer you a significant tax deduction?
Some retirees say they are having trouble getting mortgages, even with a guaranteed income and the highest credit scores.
But New Jersey builder Bruce Paparone said he checked with other builders, including one with two over-55 communities, and a mortgage broker he deals with, and "they have not had any issues with financing the senior market."
Philip Cassidy, of Sun Home Loans in Trevose, Pa., said many newly retired people may be having problems because they cannot yet "zero in" on an exact amount of income to take as necessary living expenses. When asked to report the amount of income, he said, they estimate low, and that hurts their mortgage qualification.
Age is not the issue.
"We cannot, do not and will not discriminate based on age," said Philadelphia mortgage broker Fred Glick. "Even a 90-year-old can get a 30-year mortgage."
Still, whether you are a 35-year-old couple with high-paying jobs or retirees with great credit and fixed incomes, "getting a mortgage these days is more cumbersome than it used to be," said Jerome Scarpello, of Leo Mortgage in Ambler, Pa.
"People with poor credit may not have any options, and even good, qualified borrowers are going through additional questioning," Scarpello said. In other words, don't take it personally if you are raked over the coals.
Lenders are taking no chances and don't want to end up having to buy back your mortgage because their investors find something incomplete in the loan file. As a result, borrowers can expect "detailed tracing of their assets, closer scrutiny of the stability of their income, and more conservative appraisals," Scarpello said.
Qualified borrowers will get their loans, he said. "They just may need to explain large deposits, will not need 'bonus income' to qualify, and need to be prepared to document their finances."
Though newly retired people no longer have income from their jobs, pensions or Social Security can be used to qualify for mortgages, as long as they can be documented.
"But normally that income is less than what they earned while employed," Scarpello said. "So if your income is lower, the (mortgage) amount you qualify for is lower, as well."
To prepare for retirement, and the possibility you may need to carry a mortgage, you need to have a financial plan to establish priorities to give you some room to breathe more easily, Basso said.
"Get rid of the bad debt," she said, especially any high-interest credit-card debt. And if you cannot pay off your current mortgage, try to refinance it at today's lower rates at a shorter term.
Basso said one of her clients told her he was doing just that, refinancing a 30-year mortgage to a 10-year "and saving a lot of interest."
"You have to look at your cash flow and how well you can manage your debt before you decide whether or not to get a mortgage," she said.
"There are so many things to think about. But first you need a plan."