However, if you are considering taking out a mortgage in retirement, it is important to carefully consider your financial situation, especially as your income may have changed. Here’s what you need to know in order to get a home loan as a retiree or senior.
As a senior, can you get a mortgage?
When it comes to taking out a home loan retirementMortgage lenders look at many numbers to decide whether a borrower is qualified – but age isn’t one of them. The Equal Opportunities Act makes it illegal to discriminate against a loan applicant based on age.
“I took out a 30-year mortgage once for a 97-year-old woman,” recalls Michael Becker, sales director and lender at Sierra Pacific Mortgage in Lutherville, Maryland. “She was clear, understood what she was doing, and just wanted to help one family member [by taking] some money out of her house and had the income to qualify and the equity in the house – she owned it free and clear – so she got approved. “
When senior citizens apply for a mortgage, lenders consider the same criteria as they would for any other borrower, including:
The minimum credit score to get a traditional loan backed by Fannie Mae or Freddie Mac is 620, although that score won’t qualify you for the best interest rates. A DTI ratio of up to 50 percent may be acceptable, but lenders want you to spend less than 45 percent of your monthly income on debt payments, including your mortgage.
“The same underwriting guidelines apply to retirees and senior citizens as to everyone else,” says Becker. “You need to be able to repay the loan – that is, you need to have the income and assets to qualify.
“If the retiree has a non-taxable retirement income, such as Such as social security income or tax-exempt interest, this income can be extrapolated or increased by 15 to 25 percent, depending on the loan product, to qualify for the loan. Adds Becker.
Should You Get a Mortgage in Retirement?
You can get a retirement home loan for a number of reasons, including when:
- You want to Refinancing to lower your monthly payments because you have a steady income
- You have a lot of equity in your home, but no or limited retirement savings to fall back on
- You want to consolidate debt
- You want to buy or retire a smaller home Holiday home
- You want to release cash for one 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 the personal finances of most seniors, the idea of fixed income comes into play,” said Mark Hamrick, senior economic analyst and head of the Washington office at Bankrate, who emphasizes the importance of predicting which ones Housing and other costs will cost.
“Even if you own a property that has no further mortgage payments, property taxes and maintenance will be a consideration,” says Hamrick. “While inflation has been fairly subdued for many years, the prices of staples such as housing and health care have increased over time. As with people of all ages, it is crucial to have a budget, limit spending, and accurate income expectations consider.”
Also, if you and your partner or spouse are older, consider 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 home. For example, one of Becker’s customers is buying a retirement home and has the assets to pay for it in cash. However, she decides to cut 50 percent and take out a mortgage on the balance.
“As soon as her existing home is sold, she will put the money back into her [investment] Accounts instead of paying back the loan so these assets can make money for them, ”Becker says. “She is paying 2.875 percent on the loan and her investment advisor is confident she can get much better returns on her money in the medium to long term.”
If you are living on social security and have no significant savings, taking out a mortgage may not be a wise decision.
“If the retiree doesn’t have these additional debts, they can pay other bills like groceries, health care, insurance, property taxes, and utilities,” Becker says.
6 Mortgage Options For Seniors
There are numerous mortgage options available to retirees or senior citizens who qualify. Here are six home loans to consider:
- Conventional loan – A conventional mortgage is issued by a private lender and is not secured by the government, as is the case with FHA and VA loans. You have to pay 20 percent for a traditional loan or for private mortgage insurance (PMI).
- Disbursement Refinancing – With a payout refi, you can get a brand new mortgage, usually at a lower interest rate and possibly shorter term, and can withdraw some of your home’s equity to use for what you want.
- Home equity loan – A home equity loan is a lump sum loan, usually with a fixed interest rate, fixed monthly payments, and a term of between five and 30 years. Typically, you need at least 20 percent equity to qualify. Lenders have loan-to-value (LTV) limits that help them decide how much to borrow.
- Home Equity Credit Line (HELOC) – A HELOC is an adjustable rate loan that works in a similar way to a credit card. You will be given a line of credit that you can fall back on if necessary. You have a certain number of years to pull the money and then a certain amount of time to repay the loan. Your monthly payments will vary depending on interest rate trends and the size of the line of credit you use.
- Home Conversion Mortgage (HECM) – A HECM is the only federal government insured reverse mortgage and is available through FHA approved lenders. Anyone considering this type of loan must meet with a HECM advisor. To qualify, you must be at least 62 years old, own all of (or near) your home, and have your primary residence in the house. You must also be able to pay property taxes, insurance, HOA fees, and other alimony payments for the home.
- Mortgage without documents – With a no-doc mortgage, the lender does not need to verify the borrower’s income. It’s an unusual product, but it can be an option for borrowers who have irregular income. No-doc loans typically require a higher credit rating and a decrease of at least 30 percent. You can also expect to pay a higher interest rate compared to a traditional loan.
Which documents do you need?
Aside from what is required to prove your identity, the documents required for a mortgage are slightly different for retirees. Instead of Paystubs and W-2 forms, you will need to provide 1099 forms to your lender to document receipts from the following sources:
- Social Security
- Withdrawals from retirement accounts or required minimum distributions (RMDs)
- Interest income
- Dividend income
- Other income, e.g. B. from rental properties
“Generally, two months of bank statement are required to show that payments have been deposited into the retiree’s account,” says Becker. “Since there is no paycheck, the bank statements serve the same purpose. The deposits must match what the 1099s show. “
However, capital gains are reported on the IRS Form 1040. For interest, dividends, and capital gains, Becker says that you “have a two year history of these types of income and you need to provide evidence of it [you] have enough wealth to enable these types of income to continue. “
You may also need to set up:
- Signed federal income tax return
- Retirement Award letters
- Proof of current income
- Letters from income generating organizations
Retirees with good credit, income and assets, and little debt can take out a mortgage, but the process of getting a mortgage may be a little different. Some of the reasons you might want a retirement loan are to want to refinance to a lower payment, add emergency funds, consolidate debt, or buy a new home or remodel your current one.
Remember that seniors can be the target of scams. So take precautions when buying a mortgage or other financial product. Gordon Miller, owner of Miller Lending Group, LLC of Cary, North Carolina, notes that loan records are complicated and important details can be easily overlooked.
“They get a payment and interest, sign the papers, and don’t see that $ 20,000 was added for closing costs,” Miller says. “Never go to a deal without your lawyer or someone you trust reviewing the records to make sure the costs are what you think they are. At the end of the phone, don’t rely entirely on the other person. Don’t make a sole decision. “