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“Get a mortgage before I retire? I thought I was supposed to pay off my mortgage before I retire.”
The conventional wisdom — that it’s best to enter retirement without debt — is sound. But if you will have to carry a mortgage into retirement or will do so strategically, you may benefit from securing whatever home financing you need before leaving the workforce.
Qualifying for the mortgage may be easier and you may be able to borrow more.
The importance of income
“A mortgage in retirement isn’t automatically bad,” said Carlos A. Temperan, vice president of personal risk management with the private client group of Coastal Wealth, a MassMutual firm in Coral Gables, Florida. “It’s only bad when it competes with your freedom. If the payment forces you to draw down investments faster than planned or lose sleep at night, it’s too expensive, even if the rate is great.”
Lenders don’t want borrowers to end up in a situation where they can’t make agreed-upon mortgage payments. That’s why they do a thorough analysis called underwriting when you apply for a mortgage. Calculating and verifying your income is a key component of that examination.
“Ultimately, it’s a cash-flow question, not a moral one,” said Gabe Gould, a financial advisor with the Charleston, South Carolina, office of Coastal Wealth. “If the payment is predictable and the rest of the plan is strong, keeping a mortgage can preserve liquidity and flexibility.”
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After retiring, however, you can’t simply provide copies of W-2s (the tax forms that show annual employment earnings) to prove that you have the cash flow to repay the loan. Qualifying with Social Security and pension income is simple enough, but qualifying with income and assets from accounts like 401(k)s and IRAs can get tricky.
Using retirement assets to qualify for a mortgage
Once you leave your job, you may not start taking retirement account distributions right away. You might use other assets first and let those accounts’ tax-deferred growth continue as long as possible.
Fortunately, you can ask lenders to consider the income potential of those untapped assets when you apply for a mortgage.
The most common standards lenders will follow come from Freddie Mac. That’s because lenders often resell mortgages to this government-sponsored enterprise, provided those mortgages (and the borrower’s qualifications) meet their standards.1
Freddie Mac’s retirement asset eligibility guidelines say that lenders can divide an applicant’s retirement account balance by 240 and count the result as qualifying monthly income — as long as you’re fully vested in the balance and you’re at least 62 years old.
Freddie Mac asset-depletion mortgage example for a retiree
Helene has $1 million in an IRA. She’s 63 and retired. Helene’s lender divides $1 million by 240 to get $4,167 in monthly qualifying income.
What if Helene needs to tap her 401(k) to pay the loan’s closing costs?
- First, the lender will subtract the $15,000 in cash Helene needs to pay the loan’s closing costs. That leaves $985,000 for mortgage payments. (Closing costs are typically 2 percent to 5 percent of the loan amount.)
- Next, the lender must divide $985,000 by 240.
- The result is $4,104 in monthly qualifying income.
That’s the equivalent of qualifying with a preretirement salary of $49,248.
How much house can an asset-depletion loan buy?
Let’s assume Helene has no other debt, no other income, and the lender will let her put 45 percent of her $4,104 monthly income toward her housing payments. That’s $1,847 to cover the mortgage principal and interest, plus homeowners insurance and property taxes.
We’ll assume homeowners insurance costs $100 a month and property taxes cost $200 a month. Helene’s mortgage payment can’t be higher than $1,547.
Helene is downsizing her home in retirement and has home equity that she’ll put toward a 30 percent down payment. If she can get a 5 percent mortgage rate, she can buy a home that costs about $412,000. That’s roughly equivalent to the U.S. median home price in 2025, so it might be sufficient.
Applying while working can mean a larger loan
There is no magic formula that says that if you have $1 million in your IRA at age 63, you must have been earning $X annual salary toward the end of your career. This means we can’t make a perfect comparison to what Helene would have qualified to borrow while working versus what she qualifies to borrow based on her IRA balance after retiring.
We’ll pick a few salary levels that seem plausible for someone who has amassed $1 million and show what Helene’s qualifying monthly income might have been a few years earlier.
● $100,000 salary = $8,333 monthly income
● $80,000 salary = $6,666 monthly income
● $60,000 salary = $5,000 monthly income
Under these scenarios, Helene could potentially have borrowed significantly more if she obtained a mortgage while still working.
Qualification vs. affordability
What a lender’s calculations say Helene could afford at any point in her life and what Helene can actually afford may be two very different amounts. They don’t know whether she stands to inherit $2 million, what her other monthly expenses are, or when she’ll start claiming Social Security.
Helene might consider working with a financial professional before even applying for a mortgage to get help analyzing the nuances of her situation, because mortgage lenders won’t take this step.
“Lenders care whether you can qualify today,” Temperan said. “We care whether you can still comfortably pay when the market dips, health care costs spike, and your income is coming from Social Security and [retirement account] withdrawals.”
Lenders do not require borrowers to actually start taking these withdrawals as a condition of getting the loan; they just use this calculation to qualify borrowers. In fact, if a borrower has started taking retirement distributions, the math changes.
Qualifying based on retirement account income
What if Helene were already drawing on her retirement accounts when she applied for a mortgage? Would she still qualify for a smaller loan than she would have while she was working?
Maybe. A lender following Freddie Mac’s retirement account distributions as income requirements would look at the frequency, regularity, and duration of Helene’s retirement account distributions.
● Is she taking regular distributions in fixed amounts (akin to a salaried worker’s paycheck)?
● Is she taking irregular distributions in fluctuating amounts? Irregular distributions aren’t necessarily a problem; it’s just that the amounts will need to be averaged out to come up with a monthly income.
● How long has she been taking distributions?
● Does she have enough assets remaining in her retirement account to support at least three years of mortgage payments?
By the way: If you’re having trouble securing an asset depletion loan, it may be possible to qualify for a mortgage by starting to take regular distributions from your retirement account in an amount large enough to qualify for the mortgage you want.
Beyond Freddie Mac: Borrowing from a non-qualifying mortgage (non-QM) or portfolio lender
Some lenders follow different underwriting guidelines that may allow you to qualify for a mortgage once you’re retired even if Freddie Mac’s mortgage guidelines do not. Or, these lenders’ guidelines may qualify you to borrow more.
These lenders can sell non-QMs to different investors. They can also keep the mortgages they originate (essentially holding them in their portfolios as an investment) instead of selling them.
With different investors come different mortgage applicant qualifications.
Casey Fleming, author of Buying and Financing Your New Home and The Ultimate Guide to Reverse Mortgages, and a mortgage advisor with Silicon Valley Mortgage in the San Francisco Bay Area, explained that some lenders will assume the assets will continue to earn interest while they are being depleted, whereas Freddie’s formula assumes they earn nothing and may, therefore, be overly conservative.
A more conservative lending formula means you can’t borrow as much (which might mean you’re less likely to default). But a non-QM lender might be far less conservative than Freddie Mac. We found formulas that would let a borrower have a qualifying monthly income of anywhere from $8,333 to $13,333 with $1 million in retirement assets.
Having a retirement account balance of $1 million doesn’t mean the lender will use that entire $1 million to qualify you. They might discount it by 20 percent or 30 percent to account for things like taxes and investment volatility. But if they’re dividing that amount by 60, 84, or 120 months instead of 240, you stand to qualify for a much larger loan.
Borrowing to the max
If you really want to max out your borrowing power, you could:
● Get a mortgage while you are still planning to keep working for at least three years. You could then use your work income and your retirement assets to qualify with some lenders.
● Wait until you’re receiving Social Security benefits and combine that income with your retirement assets or retirement distribution income.
Borrowers should carefully consider, however, whether it makes sense to borrow based on their preretirement income or a specialty lender’s more generous qualifications.
“When someone is considering a new mortgage close to retirement, my job is to stress-test it against real life, not best-case assumptions,” Gould said. “We model the payment alongside Social Security timing, health care costs, required withdrawals, and down-market scenarios to make sure the plan still works when things get noisy. If the numbers are tight, we can explore levers like a different term, a larger down payment, or a clearer payoff strategy before income becomes less predictable.” (Related: Why renting may be better than owning in retirement)
The bottom line
The goal is not to borrow as much as possible for a home, but to enjoy a comfortable retirement. Still, it’s good to know how lending guidelines may affect your future.
“I recommend that folks thinking about retirement investigate their options, and choose the mortgage plan that works best for them before they announce to their employer that they are retiring,” Fleming said.
With input from lenders and a financial professional’s help, near-retiree borrowers would be wise to do the math to see whether qualifying after retirement will be unnecessarily difficult.
“Sometimes it doesn’t matter — if, for instance, you qualify just fine with your retirement income, then you don’t need to worry about it,” Fleming said.
In any case, thinking ahead can help keep retirement plans on track.
Learn more from MassMutual…
Giving yourself permission to spend in retirement
Why some seniors upsize their homes in retirement
Mortgages in retirement: What you need to know
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