Q: How do retired people with a mortgage-free home and a limited budget (Social Security and retirement) sell and buy a home? Would they qualify for a mortgage or have to sell the home before buying a new home? Are there creative ways to do this? –Sue

A: I suspect this question will be coming up more and more often in the future, as baby boomers continue to retire. It’s important to note that many do continue to work on some level after retirement, and many don’t own their homes free and clear. It seems like congratulations might be in order for being able to completely retire and pay your house off (or keep it mortgage-free)!

1. Income is as income does. Most lenders will use retirement income, including a pension or monthly Social Security stipend, to qualify a borrower for a home mortgage.

They view it and treat it just like they treat salary or wages — and they require you to document it in a similar way. The lender will want to run your credit; see your most recent tax returns, as well as statements from all your accounts (including any retirement accounts); and see your Social Security and pension or other retirement system award letters.

2. You might need to sell, then buy — or not. While it’s true that your retirement income looks just the same to lenders as another borrower’s employment income does, debt-to-income ratios and income documentation guidelines have tightened up so much that it can be difficult to qualify for a new mortgage without the cash in the bank from your existing home. So the fact that you own your current home free and clear is a huge benefit.

While the lender won’t necessarily give you any credit for your existing home (i.e., lenders won’t make presumptions about when or for how much you’ll sell it, or how much cash you’ll end up with in hand when you do), neither will it serve as a liability on your mortgage application the way it would if it you were obligated to make a monthly mortgage payment on it.

The fact is, there are challenges and benefits either way you go, whether you decide to sell first or buy first. Obviously, if you sell first, you have the challenge of finding a place to live while you house hunt. On the flip side, you have the security of knowing exactly what your proceeds of the sale will be before buying, which might help you buy well within your means.

Also, if you decide to buy first, you’ll face the possible stressors involved if your home takes a long time to sell or sells for less than you expected, not to mention the challenges of a mortgage payment you’re not used to and the financial burden of maintaining and paying property taxes on two homes at once.

3. Get briefed on all your options. Ask your friends and relatives if they have a mortgage broker they trust implicitly, and set an appointment to get the pro’s input on your next steps. The mortgage broker can run all the numbers involved and tell you what you should be able to qualify for, dollar-amount-wise, before and after you do get your home sold.

The mortgage broker will also give you all of your options, including whether you can qualify for a new mortgage without selling. For instance, if (1) you’re buying to downsize, (2) moving to a less expensive area, (3) you have a hefty savings or asset portfolio or (4) the homes you’re targeting are modestly priced vis-à-vis your income, you might not need to sell your existing home before you qualify to buy the next one.

They might also offer you some more creative options, and sketch out the financial details of what some alternative scenarios would look like. For example, a mortgage broker might help you consider essentially refinancing your existing home, borrowing enough cash to fund your next purchase, then paying that loan back from the proceeds when you do get your home sold.

4. Get creative. If, in all the time you’ve ever owned a home, you ever fantasized about the adventures you’d undertake if you were footloose and fancy-free, consider taking this opportunity to go for it!

Sell your home, then rent a chic loft or a writer’s cabin somewhere, or travel for a year, while you house hunt.

And there are some other, more inside baseball-style creative options to explore, in the same vein of taking out a mortgage on your existing house to pay for your next one.

Talk with a local agent about the possibility of selling your home, then leasing it back from the buyer. Also, when you talk with your mortgage pro, explore the prospect of relatively short-term financing for your new home, which might offer a lower interest rate and monthly payment than a long-term loan, and which might make sense if it’s truly realistic that you’ll pay it off in the near future when you do get your home sold.

Work with a local real estate agent who has a recent track record of success at selling homes in your area, and bring your tax, financial planning and estate planning advisers into the conversation as you try to understand and explore the full spectrum of available options. If you have such a team in place, take maximum advantage of their thoughts and experience as you put your personal action plan in place.

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