Mortgages for seniors: Getting a home loan in retirement

We think of homebuyers as young people: newlywed couples, new parents. But retirees and senior citizens have plenty of reasons to be house-hunting, too. And even if the current economic climate isn’t ideal, with home purchase prices and interest rates staying stubbornly high, waiting years for it to change isn’t an option for them. They need and want a mortgage now.

But does the mortgage industry want them?

Some recent studies (and press articles) indicate that it may be tougher for seniors to qualify for mortgages, home loans and refis. So if you’re considering getting a home-related loan post-retirement, it’s doubly important to assess your financials.

Here’s what you need to know about getting home financing as a senior citizen, from how to qualify to what the options are to whether it’s even worth it.

Can you get a mortgage as a senior?

When it comes to getting a home loan, mortgage lenders look at a lot of numbers to decide whether a borrower is qualified — but age isn’t supposed to be one of them. It’s one of the protected categories specified by the Equal Credit Opportunity Act, which makes it unlawful to discriminate against an applicant because of age (along with race, religion, national origin, sex and marital status).

“The same underwriting guidelines apply to retirees and seniors as does to everyone else,” says Michael Becker, branch manager and loan originator at Sierra Pacific Mortgage in Lutherville, Maryland. “They must have the capacity to repay the loan — that is, have the income and assets to qualify.

“I once did a 30-year mortgage for a 97-year-old woman,” he recalls. “She was lucid, understood what she was doing and just wanted to help out a family member [by taking] some cash out of her home, and had the income to qualify and the equity in the home — she owned it free and clear. So she was approved.”

There can be several reasons why you as a senior or retiree would want to get a mortgage or home loan, including when:

• You want to refinance. If you have an existing mortgage with a high interest rate, refinancing it can get you a lower-rate loan. Doing so may lower your monthly payments, which can be useful if you’re on a fixed income.
• You have lots of home equity. Tapping into your ownership stake for big expenses or even a down payment on another place could make sense.
• You want to consolidate debt. If you have high-interest debt, you could opt for a cash-out refinance or home equity loan to pay off those bills at a lower interest rate.
• You want to downsize. Feeling that empty-nest syndrome? You can sell your current place and use the funds to buy a smaller home and put the rest into your retirement account.
• You want to renovate or repair your current home. Tapping into your home equity to do home improvements or modifications (perhaps to enable aging-in-place) can be a smart strategy, as the loan interest is tax-deductible in these cases.
• You want to build an emergency fund. You can use a home equity line of credit (HELOC) as an emergency fund, though it’s generally not the best idea.

Is qualifying harder for seniors?

Despite the law, it seems to be more challenging for seniors to qualify for home financing. A Federal Reserve Bank of Philadelphia paper, “The Age Gap in Mortgage Access,” published in February 2023, reveals that the rate of rejection for mortgage applications rises steadily as people age. Compared to a rejection rate of 17.5 percent for mortgage applicants of all ages, the rejection rate hit 19 percent for people in their 60s and exceeded 20 percent for those 70 and older. It also found that older borrowers paid higher interest rates on their loans.

A October 2021 study published by the Urban Institute, “Mortgage Denial Rates and Household Finances among Older Americans,” had similar findings, with rejection rates for those 65 and up as much as three, six and even seven percentage points higher (depending on age group and loan type) than the denial rates for people under 65.

Why are lenders more likely to deem older applicants unfit? Some of the rationale is financial, with seniors and retirees having a high debt-to-income ratio (more on that in the next section), reflecting their smaller and often fixed incomes. A high DTI can call into question their ability to make monthly payments, especially for variable interest-rate products, like ARMs and HELOCs.

Another oft-cited reason for rejection: “insufficient collateral.” This problem could reflect senior applicants living in older homes that, due to age or deterioration, aren’t worth as much — and so unable to back a refi or home equity loan.

Of course, these factors are more correlative than causal. But there could be  another, elephant-in-the-room reason that does directly touch on age: the life expectancy of the borrower. It is “plausible … that lenders could be taking into account the costly effects of age-related mortality risk when making loan decisions,” as “The Age Gap” author Natee Amornsiripanitch notes in a brief accompanying his study. Even under the Equal Credit Opportunity Act, lenders may consider age a relevant credit-risk factor. To put it crudely, a senior’s shorter life-span — the odds they’ll die before the loan’s paid off — can make them seem less creditworthy.

How to qualify for a mortgage in retirement

When seniors apply for a mortgage, lenders look at the same financial criteria as they do for any other borrower, including:

• Credit history and score
• Debt-to-income (DTI) ratio
• Income and other assets

Here are the minimum credit scores needed based on loan type:

Bear in mind that minimum scores can allow you to qualify for a loan in general, but you won’t get the best interest rates the lender has to offer.

You’ll also want to calculate your DTI using this formula:

A DTI ratio as high as 50 percent might be allowed, but lenders prefer to see you spend less than 45 percent of your monthly income on debt payments, including your mortgage.

Besides what is required to prove your identity, the documents needed to qualify for a mortgage are slightly different for retirees. Instead of pay stubs and W-2 forms, you’ll have to supply your lender with forms to document income.

Here are the types of income you may have and the information you’ll likely need to provide.

In addition to or (in some cases) instead of the above, “generally, two months’ of bank statements are needed to show those payments being deposited into the retiree’s account,” Becker says. “Since there is no paycheck, the bank statements serve the same purpose. The deposits have to match what the forms show.”

Investment income — capital gains, dividends, distributions and interest — are reported on your tax return, aka IRS Form 1040 (possibly backed by 1099s  and Schedule K-1). Becker says you “must have a two-year history of those types of income and show that [you] have enough assets for those types of income to continue.”

You might also be required to furnish:

• Proof of current receipts
• Letters from organizations providing income

“If the retiree has retirement income that is nontaxable, like Social Security income or tax-exempt interest, that income can be ‘grossed up,’ or increased 15 to 25 percent, depending on the loan product, to help qualify for the loan,” adds Becker.

Should you get a mortgage in retirement?

Many experts do not recommend retirees taking on mortgage debt. Making sizable mortgage payments every month gets trickier when you don’t have a steady source of earnings. Using your retirement savings to pay down your mortgage can make it difficult to enjoy a comfortable retirement lifestyle and cover unexpected future costs like medical bills.

“When we think about personal finances for most seniors, the notion of a so-called fixed income comes into play,” explains Mark Hamrick, senior economic analyst and Washington bureau chief for Bankrate, who stresses the importance of accurately anticipating what housing maintenance expenses will cost.

“Even if one owns a property with no further mortgage payments due, property taxes and upkeep will be a consideration,” he says. “As with people of all ages, having a budget, limiting expenses and accurately accounting for income expectations are key.”

Then again, working hard to pay off your mortgage debt prior to retirement, such as by making accelerated payments or refinancing to a shorter-term loan, may not be the best strategy either. It could leave you financially vulnerable and unable to pay for emergencies.

Loan strategies for seniors

Taking out a mortgage can be a smart play for retirees who can afford to make a substantial down payment for a home. One of Becker’s clients, for example, bought a retirement condo. She had the assets to pay for it all in cash but she opted to put down 50 percent and finance the rest — a middle road between exhausting your savings and saddling yourself with a lot of debt.

Admittedly, the math on such a move is less advantageous now, in a rising interest rate environment with rates for the 30-year fixed mortgage now hovering near or above 7 percent. But it could still be a savvy strategy: Putting up more cash makes you a less-risky proposition in a lender’s eyes.

Along with a smaller loan, consider a shorter loan — say, a 15-year mortgage instead of the benchmark 30-year. Yes, your monthly payments will be higher, but your interest rate will be lower. And if lenders are in fact factoring your life expectancy into the equation, they might feel better about the odds of your carrying the mortgage to maturity.

Of course, both these strategies require you to have substantial means. If you’re essentially living from pension paycheck to paycheck, taking on a mortgage might not be a wise decision. “Not having that additional debt will help the retiree pay other bills, like food, health care, insurance, property taxes and utilities,” Becker says. If you have a spouse or partner, you should also consider what would happen if one of you were to die and how that would affect the survivor’s ability to repay the loan.

6 mortgage options for seniors

There are plenty of home loan options available to retirees or seniors — mostly the same as for anyone, with one exception. Here are six to consider:

Conventional loan – A conventional mortgage is one issued by a private lender, not backed by the government like FHA and VA loans are. You must put down 20 percent for a conventional loan or pay for private mortgage insurance (PMI).

Cash-out refinance – With a cash-out refi, you’ll get a brand-new mortgage, usually at a lower rate and maybe a shorter term, and cash out some of your home’s equity to use for what you wish.

Home equity loan – A home equity loan is a lump-sum loan, usually with a fixed rate, fixed monthly payments and a term between five and 30 years. You typically need at least 20 percent equity to qualify. Lenders have loan-to-value (LTV) limits that help them decide how much can be borrowed.

Home equity line of credit (HELOC) – A HELOC is a variable-rate product that works similarly to a credit card — you’re given a line of credit to draw on as needed. You’ll have a certain number of years to draw the money, then a certain amount of time to repay the loan. Your monthly payments will vary based on the movement of interest rates and how much of the credit line you’ve used.

Reverse mortgage  – A reverse mortgage is loan taken out against your current home, in which a lender pays you monthly installments; these must be repaid, or the home surrendered to the lender, when you die or move out.  Most advisors recommend you limit yourself to a home equity conversion mortgage (HECM), the only reverse mortgage insured by the federal government and available through FHA-approved lenders. To qualify, you must be at least 62 years old, own your home outright (or close to it) and live in the home as your primary residence. You also have to be able to pay for the property taxes, insurance, HOA fees and other upkeep on the home.

No-document mortgage – A no-doc mortgage does not require the lender to verify the borrower’s income. It’s an uncommon product, but it can be an option for borrowers who have irregular income. No-doc loans generally require a higher credit score and at least 30 percent down. You can also expect to pay a higher rate compared to a conventional loan.

Bottom line on mortgages for seniors

Retirees who have good credit, sufficient income and assets and not a lot of debt can get a mortgage or home loan. However, the process of obtaining one might look a little different and be a bit tougher. It’s important to calculate your income, assets and savings after retirement, total housing expenses, life goals and life expectancy.

If you’re determined to purchase or refinance a home in retirement, do your homework. Crunch the numbers carefully and evaluate your ability to afford repayments now and in the future. Assess life goals and your health. Consider how much you’ll need to keep salted away for emergencies and medical costs. And consult with a financial expert/planner for expert advice when in doubt.

Additional reporting by Erik J. Martin