The ins and outs of applying for a retirement loan
Retirees can own homes and cars, but that doesn’t mean they can’t use a loan either. From paying for emergency expenses to providing tax benefits, loans can be beneficial for older Americans for a number of reasons.
“It’s not uncommon for retirees to realize they need to get their hands on a lot of money,” says Ric Edelman, founder and executive chairman of consulting firm Edelman Financial Services in Fairfax, Virginia. Seniors can have a Medical emergency, find out that their house needs a major renovation or decide to help a adult child with fee.
Other times, the elderly may apply for a loan for a better interest rate or to maximize tax savings. David Kanani, founder of the financial firm Kanani Advisory Group in Irvine, Calif., Says he most often sees retirees applying for loans at refinance their mortgage, to downsize to a smaller house or to buy a second home.
Whatever reason a retiree may be interested in getting a loan, the application process is the same for retirees and working adults. However, older applicants may need to go through some additional steps, such as creating an income stream or using their assets to demonstrate their ability to repay.
Read on to learn more about what you need to know to get a loan after leaving the workforce.
Select the right loan. Older Americans may be eligible for a number of types of loans: home equity, auto, personal, and security lines of credit, to name a few. Of these, refinancing or obtaining a mortgage may be the most attractive because of the possibility of deducting mortgage interest on detailed tax returns.
“With the new tax law, a lot of deductions were taken out, ”says Andrew Marquis, senior loan officer in Lexington, Massachusetts, office of the guaranteed rate mortgage provider. Seniors always want to take advantage of tax deductions, and mortgage interest allows them to do so.
While many forms of retirement income, such as money from traditional 401 (k) s and IRA, may not be taxable, seniors may still find that they owe federal taxes on part of their Social Security or on earnings from other investment income. Deducting interest on a mortgage can help offset these tax obligations. Plus, a home equity line of credit or mortgage refinancing can provide seniors with a source of cash that doesn’t require them to liquidate other investments.
Seniors who are worried that they may not qualify for a mortgage or other loan can turn to a back-to-back line of credit. These loans allow investors to take out a loan equal to 50 to 95% of the value of their investment portfolio. There is usually little documentation required for these loans and the interest rate is often low. However, Edelman says they can be risky, and if the market in the event of a breakdown, borrowers may have to repay the loan within 24 hours.
Other elderly people may find a Personal loan meets their needs, but Erica Duncan, regional banking director at financial firm PNC Wealth Management, says the only way to be sure is to talk to a loan expert. “Our main advice is to consult a professional,” she says. “Look at all the options out there.”
Remember that three factors will be taken into account. For many loan products, lenders will rate senior applicants on the same three criteria they use for young borrowers: income, assets, and credit.
Of these criteria, income is the most problematic for some senior borrowers. Social Security or pension payments alone may not be enough to qualify someone for a loan. In this case, Kanani says periodic payments can be set up from retirement funds or investment accounts.
“What we’re doing is creating an income stream for three years,” Kanani says. “This is the most important piece of the puzzle.” Most lenders generally use three years to assess income. Kanani says that while her clients don’t need to make withdrawals from investment accounts, they set up periodic payments to demonstrate to banks that they have access to the money they need. Once the loan is approved, payments can be suspended.
Assets can often replace insufficient income, Marquis says. “A lot of times we can qualify seniors for what we call asset depletion,” he says. This involves dividing a person’s available assets by 36 months to determine how much they could use, in theory, on a monthly basis. For example, a person with $ 1 million in investment could be considered to have access to a monthly income of $ 27,777 using this asset depletion strategy. “I rarely meet a senior that I cannot qualify,” he adds.
When it comes to credit, Kanani recommends that seniors try to maintain a credit rating of at least 720 to qualify for loans. Paying off balances and making payments on time are both ways to improve your credit score.
Be realistic about the reimbursement. Just because an elderly person is eligible for a loan does not mean they should take one. “It is particularly important for retirees to understand their budgetDuncan said.
Seniors usually have limited funds to spend an unknown period of time. Today’s lifespans mean that it is not uncommon for people to reach their 80s, 90s and beyond. That means money in retirement accounts may have to last 20 to 30 years or more. Spending money on debt repayment could make it difficult to maintain savings during this time.
“We cannot discriminate on the basis of age,” says Marquis. “I have already taken out a 30-year mortgage for a 92-year-old”. If you’re taking a long-term loan, know how it will affect your estate and any inheritance you plan to leave to your heirs.
Seniors are not excluded from getting loans, but working with a professional can ensure you have the right stream of income to qualify for a loan and enough assets to comfortably pay off debt without jeopardizing your future. .