Mortgages for seniors: What to know before getting a home loan in retirement

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With mortgage rates still at historic lows, retirees and seniors can take advantage of the opportunity to downsize, buy a vacation home, or tap their home equity to boost cash reserves, pay off debt or remodel.

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 getting a home loan as a retiree or senior.

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, sales 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:

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. 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 to lower your monthly payments because you’re on a fixed income
  • You have lots of equity in your home, but no or limited retirement savings to draw on
  • You want to consolidate debt
  • You want to buy a smaller home for retirement or vacation home
  • You want to free up cash for an emergency fund
  • You want to remodel or repair your current home

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. “While inflation has been fairly muted for many years now, prices have risen for such staples as shelter and health care over time…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.

“Once her existing home sells, she will put the money back into her [investment] accounts rather than paying the loan off, so that those assets can earn money for her,” Becker says. “She is paying 2.875 percent on the loan, and her investment advisor feels confident that over the medium to long term, she can get much better returns on her money than that.”

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 mortgage options available to retirees or seniors that qualify. Here are six home loans 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.

What documents do you need?

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 1099 forms to document income from sources such as:

  • Social Security
  • Pension
  • Withdrawals from retirement accounts or required minimum distributions (RMDs)
  • Interest income
  • Dividend income
  • Annuities
  • Any other income, such as from rental property

“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 1099s show.”

Capital gains, on the other hand, are reported on IRS Form 1040. For interest, dividends and capital gains, 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:

  • Signed federal income tax returns
  • Retirement award letters
  • Proof of current receipts
  • Letters from organizations providing income

Bottom line

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 want a loan in retirement include wanting to refinance to a lower payment, boost emergency funds, consolidate debt or buy a new home or remodel your current one.

Keep in mind that seniors can be targets of scams, so take precautions when shopping for a mortgage or any other financial product. 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.”

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Written by
Libby Wells
Contributing writer
Libby Wells is a contributor covering banking and deposit products. She has more than 30 years’ experience as a writer and editor for newspapers, magazines and online publications.
Edited by
Mortgage editor