Retirees may own houses and cars, but that doesn't mean they couldn't also use a loan. From paying for emergency expenses to providing tax benefits, loans can be beneficial to older Americans for many 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 advisory firm Edelman Financial Services in Fairfax, Virginia. Seniors may have an expensive medical emergency, discover their home needs a major renovation or decide to help an adult child with expenses.
Other times, seniors may pursue a loan for a better interest rate or to maximize tax savings. David Kanani, founder of financial firm Kanani Advisory Group in Irvine, California, says he most often sees retirees applying for loans to refinance their mortgage, to downsize to a smaller home or to buy a second home.
Regardless of the 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 added steps, like 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 in getting a loan after you've left the workforce.
Select the right loan. Older Americans can be eligible for a number of loan types: home, auto, personal and securities-backed lines of credit, to name a few. Of these, refinancing or obtaining a mortgage may be most appealing because of the ability to deduct mortgage interest on itemized tax returns.
"With the new tax law, a lot of deductions have been stripped away," says Andrew Marquis, senior loan officer in the Lexington, Massachusetts, office of mortgage provider Guaranteed Rate. Seniors still want to take advantage of tax deductions, and mortgage interest lets them do that.
While many forms of income in retirement, such as money from traditional 401(k)s and IRAs, may not be taxable, seniors may still find they owe federal taxes on a portion of their Social Security or on gains from other investment income. Deducting interest from a mortgage can help offset those tax liabilities. Plus, a home equity line of credit or refinancing a home loan can provide seniors a source of cash that doesn't require them to liquidate other investments.
Seniors who worry they may not be eligible for a mortgage or other loan may turn to a securities-backed line of credit. These loans allow investors to take out a loan equal to 50 to 95 percent 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 should crash, borrowers may have to pay back the loan in as few as 24 hours.
Other seniors may find a traditional 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 with a professional," she says. "Look at all the options out there."
Remember, three factors will be considered. For many loan products, lenders will evaluate senior applicants on the same three criteria they use for younger borrowers: income, assets and credit.
Of this criteria, income is most problematic for some senior borrowers. Social Security or pension payments alone may not be sufficient to qualify someone for a loan. In that case, Kanani says periodic payments can be set up from retirement funds or investment accounts.
"What we do is set up a stream of income for three years," Kanani says. "This is the most important piece of the puzzle." Three years is the typical time period most lenders use to evaluate income. Kanani says that even if his 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 necessary money. Once the loan is approved, the payments can be stopped.
Assets can often stand in for insufficient income, Marquis says. "A lot of times we can qualify seniors on what we call asset depletion," he says. That involves dividing a person's available assets by 36 months to determine how much they could use, in theory, on a monthly basis. For instance, someone with $1 million in investments could be said to have access to a monthly income of $27,777 using this asset depletion strategy. "I rarely run into a senior I can't qualify," he adds.
As for credit, Kanani recommends seniors try to maintain a credit score of at least 720 to qualify for loans. Paying off balances and making on-time payments are both ways to boost your credit score.
Be realistic about repayment. Just because a senior can qualify for a loan doesn't mean he or she should take one out. "It is especially important for those in retirement to understand their budget," Duncan says.
Seniors typically have limited funds to stretch over an unknown period of time. Current lifespans make it not uncommon for people to reach their 80s, 90s and beyond. That means money in retirement accounts may need to last 20 to 30 years or more. Spending money on debt repayment could make it difficult to sustain savings for that period.
"We can't discriminate based on age," Marquis says. "I've done a 30-year mortgage for a 92-year-old before." If you're taking out a long-term loan, know how it will affect your estate and any inheritance you expect to leave to your heirs.
Seniors aren't excluded from getting loans, but working with a professional can ensure you have the right income stream to qualify for a loan and enough assets to comfortably pay off the debt without jeopardizing your future.
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