September 14, 2020

Edited 10/19/20

Loans in Retirement: How to Qualify

Here are some things you should know to help you qualify for a loan in retirement.

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In a word, yes–of course, depending on the standard credit factors lenders use to determine your qualification. Whether you’re looking to buy a new set of wheels, purchase a second home in the locale of your dreams or get some extra cash to make much-needed home improvements, it is possible to get a loan after you retire. 

Thanks to the Equal Credit Opportunity Act, lenders aren’t allowed to discriminate based on age, but you still need to qualify. And retirement presents some unique challenges you may not have faced when you were still employed. If you think you may need to take out a loan in retirement, here are some things you should know.

Qualifying for a Loan in Retirement

Whether you’re working full-time, part-time or your days of slogging away at the office are long gone, you must meet a lender’s eligibility requirements and underwriting criteria to qualify for a loan. Lenders look at several major factors when determining whether to approve a loan application, including your credit history, assets and income. The first two may not change much when your days in the office are over. But your income could change significantly, and that may make getting a loan a little tricky.

Credit History

Lenders like to lend to borrowers who pay their bills on time. One of the ways they assess the likelihood you’ll make your payments when you’re supposed to is by reviewing your credit history to evaluate your past borrowing and repayment behavior. If you’ve consistently made your payments on time over the years, you’re more likely to be approved than someone who has a history of late or missed payments, charge-offs and defaults. That’s why it’s important to continue to use credit responsibly and monitor your credit history even after you retire.

Assets

When you apply for a loan, lenders generally want to see that you have some extra cash on hand and aren’t stretched too thin financially. As part of the application process, they typically review your assets, including money you have in savings and other investment accounts to determine your eligibility for a loan.

Income

A lender won’t approve you for a loan if you can’t afford to repay it. Lenders use your debt-to-income (DTI) ratio to measure your ability to repay a loan, and the lower the ratio the better. In general, lenders like to see a DTI of 35% or lower. When you’re employed, it’s easy to show that you have a reliable source of income. 

In many cases, you just send the lender copies of your pay stubs or W-2 statements and voilá. Not only does the lender see how much you earn every month, they see that you’re gainfully employed, how long you’ve worked for your employer and that your income is likely to continue, so you can make your loan payments.

Retirement Income

But when you retire that’s no longer an option. As a result, providing evidence of adequate income is often the biggest roadblock retirees face when applying for a loan. The good news is there are other ways—beyond pay stubs and W-2s—to show you can make your payments.  

Social Security and pension payments are two of the most common sources of income retirees receive, but if you don’t earn enough to qualify with those two sources alone, lenders may also consider rental income, annuity payments and regular interest or dividend payments. Be prepared to show proof—such as a pension verification letter or Social Security benefit verification letter—that these sources provide a regular stream of income. 

Still not enough? If you’re making regular withdrawals from retirement accounts, lenders may also consider the income stream generated from those accounts. However, if you have stocks, bonds or mutual funds in your accounts—and most people do—only 70 percent of the income will be included in the lender’s calculation because the value of those assets fluctuates and may decrease over time. 

If you have significant assets but don’t have many streams of income, your lender may use a method known as asset depletion to determine whether you have enough money to repay the loan. With asset depletion, the lender divides the balance of one or more of your accounts by a set number of months to determine the income it would generate per month.

Add Part-Time Income and Reduce Expenses

Planning to add part-time income as part of your retirement plan? This strategy may help with showing lenders that you have another source of income when receiving a loan. For example, if you add $1,000 monthly part-time income for 10 years, this can add 5 years to your Retirement Score.

It may be helpful to add part-time income and/or reduce your expenses through other ways if you can’t receive a loan. You can reduce your spending through comparing rates for homeowners insurance, prescription drug costs, or cutting back on non-essential expenses. This can help provide you with more flexibility without having to pay back a loan and the interest fees associated with it.

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When to Apply for a Loan

No one knows what the future might hold, and you may not know whether you’ll need to take out a loan in retirement. But if you are planning to get a loan after you retire, you may want to consider completing the process before you quit your day job. Chances are with a steady paycheck and W-2, it’ll be easier to prove you have adequate income. 

If you aren’t planning to get a loan and something comes up unexpectedly that makes you change your mind, don’t panic. It is possible to get a loan in retirement. You just may need to jump through a few more hoops than if you were employed.

How Getting a Loan in Retirement Will Impact Your Finances

While it’s possible to get a loan in retirement, it’s important to think about the impact it will have on your bottom line before you move forward. Adding debt payments in retirement means you’ll have less money available to pay for other expenses such as health care or pursuing your favorite hobby. Plus, if your loan isn’t paid off when you die, assets from your estate will be used to pay it off, which may reduce the amount that gets passed down to your heirs.