What to know before getting a mortgage in retirement
With mortgage rates still at historically low levels, retirees and seniors can benefit from reduce size, buy a vacation home, or use the equity in their home to increase cash reserves, pay down debt, or renovate.
However, if you are considering getting a mortgage in retirement, it is important to carefully assess your financial situation, especially since your income may have changed. Here’s what you need to know to get a home loan as a retiree or senior.
Can you get a mortgage as a senior?
When it comes to getting a home loan retirement, mortgage lenders look at many numbers to decide if a borrower qualifies, but age is not one of them. The Equal Credit Opportunity Act prohibits discrimination against a credit applicant on the basis of their age.
“I once took out 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 a member of her family [by taking] some money from her house, and had the income to qualify and the equity in the house – she owned it free of charge and clearly – so she got approved. “
When seniors apply for a mortgage, lenders look at the same criteria as any other borrower, including:
The minimum credit score for a conventional loan backed by Fannie Mae or Freddie Mac is 620, although this score does not qualify you for the best rates. A DTI ratio as high as 50% could be allowed, but lenders prefer to see you spend less than 45% of your monthly income on debt repayments, including your mortgage.
“The same underwriting guidelines apply to retirees and seniors as everyone else,” says Becker. “They have to have the ability to repay the loan, that is, have the income and the assets to qualify.
“If the retiree has non-taxable retirement income, such as Social Security income or tax-exempt interest, that income can be ‘grossed up’ or increased by 15 to 25 percent, depending on the loan proceeds, to help qualify for the loan, ”Becker adds.
Should You Get a Mortgage When You Retire?
There are a number of reasons you can get a home loan in retirement, including:
- You want refinance to reduce your monthly payments because you are on a fixed income
- You have a lot of equity in your home, but little or no retirement savings to draw on
- You want to consolidate your debts
- You want to buy a smaller house for your retirement or vacation home
- You want to free up money for a emergency fund
- You want to renovate or repair your current home
While these are all valid reasons for getting a mortgage, the decision to get a mortgage in retirement should be based on your financial situation and personal goals.
“When you think of the personal finances of most seniors, the notion of so-called fixed income comes into play,” says Mark Hamrick, senior economic analyst and Washington bureau chief for Bankrate, who stresses the importance of anticipating precisely what housing and other expenses will cost.
“Even if you own a property without further mortgage payment, property taxes and maintenance will be a consideration,” says Hamrick. “Although inflation has been fairly subdued for many years now, prices have risen for basic commodities like housing and health care over time … As with people of all ages, having a budget, limit spending, and accurately reflect income expectations are essential. “
If you and your partner or spouse are older, you should also think about what would happen if either of you died and how that would affect the survivor’s ability to repay the loan.
Still, taking out a mortgage can be a smart game for retirees who can afford to pay cash for a house. One of Becker’s clients, for example, buys a retirement condo and has the assets to pay it off in cash, but chooses to deposit 50 percent and take out a mortgage for the balance.
“Once her existing house is sold, she will reinvest in her money. [investment] accounts rather than paying off the loan, so those assets can earn him money, ”Becker says. “She pays 2.875% on the loan, and her investment advisor is convinced that in the medium to long term, she can get much better returns on her money than that.”
If you are living on Social Security and without significant savings, however, taking out a mortgage may not be a wise move.
“Not having this extra 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 many mortgage options available for retirees or eligible seniors. Here are six home loans to consider:
- Conventional loan – A conventional mortgage is a mortgage issued by a private lender, not backed by the government like FHA and VA loans. You need to deposit 20% for a conventional loan or pay for private mortgage insurance (PMI).
- Cash-out refinancing – With a cash repayment, you will get a brand new mortgage, usually at a lower rate and maybe on a shorter term, and you will cash in some of the equity in your home to use for whatever you want.
- Mortgage loan – A home loan is a lump sum loan, generally with a fixed rate, fixed monthly payments and a term of between five and 30 years. You generally need at least 20% equity to qualify. Lenders have loan-to-value limits (LTVs) that help them decide how much to borrow.
- Home equity line of credit (HELOC) – A HELOC is a variable rate loan that works like a credit card – you have a line of credit to draw on when needed. You will have a number of years to withdraw the money and then a period of time to repay the loan. Your monthly payments will vary based on changes in interest rates and the amount of line of credit you have used.
- Home Equity Conversion Mortgage (HECM) – An HECM is the only federally insured reverse mortgage and is available from lenders approved by the FHA. Anyone considering this type of loan is required to meet with a HECM advisor. To be eligible, you must be at least 62 years of age, own your home (or nearby), and live in the home as your primary residence. You should also be able to afford property taxes, insurance, HOA fees, and other home maintenance costs.
- Mortgage without document – A mortgage without documents is one that does not require the lender to verify the borrower’s income. It is a rare commodity, but it can be an option for borrowers with irregular income. Loans without documents generally require a higher credit score and a decline of at least 30%. 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 payslips and W-2 forms, you will need to provide your lender with 1099 forms to document income from sources such as:
- Social Security
- Withdrawals from retirement accounts or minimum required distributions (RMD)
- Interest income
- Dividend income
- Any other income, such as from a rental property
“Typically, two months of bank statements are needed to show that these payments are deposited into the retiree’s account,” Becker says. “Since there is no paycheck, bank statements serve the same purpose. Deposits must 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 these types of income and show that [you] have enough assets for these types of income to continue. “
You may also be required to provide:
- Signed federal income tax returns
- Retirement award letters
- Proof of current receipts
- Letters from organizations providing income
At the end of the line
Retirees who have good credit, sufficient income and assets, and little debt can get a mortgage, but the process for getting one can seem a little different. Some of the reasons you might want a loan in retirement include refinancing at a lower payment, increasing emergency funds, consolidating debt, or buying a new home or renovating. your current home.
Keep in mind that seniors can be the targets of scams, so take care when shopping for a mortgage or any other financial product. Gordon Miller, owner of Miller Lending Group, LLC in Cary, NC, notes that loan paperwork is complicated and important details are easy to miss.
“They get a payment and an interest rate, sign the papers, and don’t notice that $ 20,000 has been added for closing costs,” Miller says. “Never go to closure without your lawyer or someone you trust looking at the documents to make sure the costs are what you think they are. Don’t rely entirely on the other person on the end of the phone. Don’t make a one-size-fits-all decision. “