Mortgages for seniors: What to know before getting a home loan in retirement
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While mortgage rates have been increasing, retirees and seniors may still want to downsize, buy a vacation home, or tap their home equity to boost cash reserves, pay off debt or remodel, even if the timing isn’t ideal.
If you’re considering getting a mortgage in retirement, though, it’s important to carefully assess your financial situation, especially because your income might have changed. Here’s what you need to know about mortgages for seniors.
Can you get a mortgage as a senior?
When it comes to getting a home loan in retirement, mortgage lenders look at a lot of numbers to decide whether a borrower is qualified — but age isn’t one of them. The Equal Credit Opportunity Act makes it unlawful to discriminate against a credit applicant because of age.
“I once did a 30-year mortgage for a 97-year-old woman,” recalls Michael Becker, branch manager and loan originator at Sierra Pacific Mortgage in Lutherville, Maryland. “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.”
When seniors apply for a mortgage, lenders look at the same criteria as they do for any other borrower, including:
- Credit history and score
- Debt-to-income (DTI) ratio
- Income and other assets
The minimum credit score to get a conventional loan backed by Fannie Mae or Freddie Mac is 620, although that score won’t qualify you for the best rates. Check your credit score before applying for a loan; you can do so for free each week until the end of 2023 by visiting annualcreditreport.com.
You’ll also want to calculate your DTI using this formula:
DTI = monthly debt payments (including mortgage or rent) / monthly gross income
A DTI ratio as high as 50 percent might be allowed, but lenders prefer to see you spending less than 45 percent of your monthly income on debt payments, including your mortgage.
“The same underwriting guidelines apply to retirees and seniors as does to everyone else,” Becker says. “They must have the capacity to repay the loan — that is, have the income and assets to qualify.
“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?
You can get a home loan in retirement for a number of reasons, including when:
- You want to refinance. If you have an existing mortgage with a high interest rate, you may be able to refinance to get 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 equity. For those with limited or no retirement savings, tapping into your home equity could make sense.
- You want to consolidate debt. If you have high-interest debt, you could opt for a cash-out refinance to consolidate that debt and access a lower interest rate.
- You want to downsize. You can sell your current home and use the funds to buy a smaller home and put the rest into your retirement account.
- You want to remodel or repair your current home. You can also tap into your home equity to pay for renovations to your current home.
- You want to build an emergency fund. You can use a home equity line of credit as an emergency fund, though it’s generally not the best idea.
While these are all valid reasons to get a mortgage, the decision to get a home loan in retirement should be based on your individual financial circumstances and goals.
“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 and other expenses will cost.
“Even if one owns a property with no further mortgage payments due, property taxes and upkeep will be a consideration,” Hamrick says. “As with people of all ages, having a budget, limiting expenses and accurately accounting for income expectations are key.”
If you and your partner or spouse are older, 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.
Still, taking out a mortgage can be a smart play for retirees who can afford to pay cash for a home. One of Becker’s clients, for example, is buying a retirement condo and has the assets to pay cash for it, but she’s opting to put down 50 percent and take out a mortgage for the balance.
The math on such a move is changing, as mortgage rates have more than doubled in 2022. What was a smart move at 3 percent rates, may not work with rates for the 30-year fixed mortgage now hovering near 7 percent.
If you’re living on Social Security and without significant savings, however, 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.
6 mortgage options for seniors
There are plenty of home loan options available to retirees or seniors that qualify. Here are six senior mortgages 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 loan that works similar 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.
- Home Equity Conversion Mortgage (HECM) – A HECM is the only reverse mortgage insured by the federal government and is available through FHA-approved lenders. Anyone considering this type of loan is required to meet with a HECM counselor. 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 is one that doesn’t 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.
How to qualify for a mortgage in retirement
Besides what is required to prove your identity, the documents needed to qualify for a mortgage are slightly different for retirees. Instead of paystubs 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.
|Income source||Form needed|
|Social Security||Social Security award letter|
|Pension||Retirement award letter|
|Withdrawals from retirement accounts or required minimum distributions (RMDs)||Federal tax returns|
|Interest income||Federal tax returns|
|Dividend income||Federal tax returns|
|Annuities||Federal tax returns|
|Rental property income||Federal tax returns|
“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.”
Capital gains, dividends, and interest on the other hand, are reported on IRS Form 1040. 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
Retirees who have good credit, sufficient income and assets and not a lot of debt can get a mortgage, but the process of obtaining one might look a little bit different. Some of the reasons you might get a loan in retirement include wanting to refinance to access a lower payment, consolidate debt, remodel your home, build an emergency fund or buy a new home.
Keep in mind that seniors can be targets of scams, so take precautions when shopping for mortgages in retirement. Gordon Miller, owner of Miller Lending Group, LLC in Cary, North Carolina, notes that loan documents are complicated and it’s easy to miss important details.
“They’re quoted a payment and an interest rate, sign the papers and don’t notice that $20,000 was added for closing costs,” Miller says. “Never go to closing without having your attorney or someone you trust reviewing the paperwork to make sure the costs are what you think they are. Don’t rely entirely on the other person at the end of the phone. Don’t make a sole decision.”