Loan Application and Retirement Plans

Just because you have retirement plans on your mind does not mean you can’t get a loan, but you must be truthful on the loan application.

Q: A caller to your radio show recently indicated that he was going to retire soon. I was disappointed that you would suggest a borrower be deceptive – granted, by omission – in applying for a mortgage.

Is this not the value system – shared by lending institutions and consumers – that contributed to the housing/mortgage crash of recent years?

A: Thanks for your comment, but we disagree with your interpretation of the answer.

The caller said he was contemplating retiring soon, but didn’t have an exact date. It could be a year away. And just because he was planning on retiring didn’t mean that he already had retired or had given notice of his retirement. After all, until he retires, he could always change his mind.

But even if he went through with his retirement, that didn’t mean he would be unable to pay his mortgage and other bills as they came due.

Borrower should be honest and truthful when filling in a mortgage application. There’s no question on that point. But lenders generally do not ask what a borrower’s plans may be past the first year in the home. The loan documents will state that the borrower plans to use the home as his primary residence and that he will continue to use the home as a primary residence for at least one year.

If the borrower has plans to rent the property down the line and retire to another location, the loan documents and lenders don’t address that during the loan application. Therefore, the borrower could go to a lender and complete the loan application truthfully to refinance the home.

It would be wrong for the borrower to complete the loan application if the borrower knew that he would be unable to pay his debts soon after the loan closing, but that did not seem to be the case with this caller. You might be thought to be committing mortgage fraud if you knowingly apply for a mortgage with the intent to not pay your obligations after the loan refinance closing.

Also, just because the caller was retiring didn’t mean that he wouldn’t have the means to make his mortgage payments. But it might change the dynamics if he had retired and then tried to refinance his home. The lender would consider the man’s income and past income tax returns in determining whether to give him a loan, a process that would not be as easy as getting the loan while still fully employed.

It’s against the law for mortgage lenders to discriminate based on age. So, lenders shouldn’t deny loans to those borrowers who are 64 just because they might decide to retire at 65. Nor should they deny loans to people that are contemplating retirement in the near future. At issue is whether someone qualifies for the loan when he applies and is truthful when he completes that application.

Some loan documents go as far as to ask borrowers whether there are any circumstances in their lives that would give rise to their inability to make payments on their loans. Some of these factors could be that they have been notified that they will be fired from their job, will become involved in litigation that may adversely affect them financially, or have undertaken other obligations that would impair their ability to make their payments under the loan. In any of these situations, the bank would be within its rights to deny a loan to a borrower in most circumstances.

We aren’t in a housing crisis because millions of borrowers suddenly decided to retire. We’re in a housing crisis in great part because millions of Americans lost their jobs and don’t have the means to make their mortgage payments – payments they were capable of making when they were fully employed.

This caller’s situation did not appear to fit within the problems that caused the housing crisis. What he wanted to do was refinance his loan now to lower his interest rate. Given how much money he will save each month after refinancing, his risk of default will actually be lower with the new loan than with his current mortgage.


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