Pensions and Social Security in the Mortgage Process

With our aging population, more and more borrowers are in their later years and have sources of income that are, at least in part, passive. This means they have an income stream coming in without actively working for it. Two sources of passive income are Social Security benefits and pension income.

The important question regarding the mortgage process is how this income can be used to qualify for a home loan.

The first thing a lender like me will want to know is how long you expect the income stream to last. Both Social Security and pensions will most likely continue through your lifetime and potentially through that of your spouse, but this must be confirmed.

The second important thing to note is how the income will be entered on a mortgage application. Pension income will be entered as if it were earned at a job. On the other hand, Social Security income has no taxation, so it is referred to as “grossed up.”

This means that the amount you receive will be artificially inflated to a more realistic number. For example, if you are receiving $1,500 per month in Social Security benefits, the lender will take that amount and multiply it by 1.25.

In our example, the $1,500, after being multiplied by 1.25, works out to $1,875. This is the amount that would be used on your mortgage application.

Other passive income to be considered includes dividend income or some type of regular income stream you receive from a retirement account and use to fund your household budget. The lender will review what this has looked like over the past two years to get an idea of what to expect in the future.

One source of income that would be ineligible for a mortgage application is an unemployment benefit, due to the fact that this will eventually run out.

Do you have additional questions? Please feel free to contact me with any questions you may have.