It’s common practice for people to downsize their homes once they enter retirement. For one thing, retirees with children often reach empty-nester status by the time their careers come to a close and therefore don’t need as much space at home. Also, retiring can mean moving over to a fixed income, and a limited one at that. As such, retirees are often forced to tighten their budgets, and downsizing is a good way to spend less.
If you plan to downsize during your senior years though, you may want to make that move before your retirement becomes official. Here’s why.
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Make it easier on yourself to get a mortgage
Many seniors enter retirement with their mortgages paid off, so when they go to downsize, they’re often able to sell their existing homes at a high enough price to buy a smaller one outright.
But not everyone enters retirement mortgage free. If you have a home you don’t expect to have paid off in time for retirement, and you’re also planning to downsize once you stop working, then you may need a mortgage to finance your smaller home. You may be more likely to qualify for a mortgage as a working professional than as a retiree.
One factor that mortgage lenders look at when evaluating applicants is income. And that makes sense. When a lender loans you money, it wants reassurance you’ll be able to pay it back.
Say you currently earn a salary of $70,000 a year, but you’re only in line for 40% as much income, or around $28,000 a year, once you retire and rely on Social Security. To be clear, that’s not a random estimate. Social Security will generally replace about 40% of your pre-retirement income if you’re an average wage earner.
If you expect to live mostly on Social Security once you retire, it means that if you wait until then to apply for a mortgage, you’ll have less income on file …….