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Many people think homebuying is just for the young, but older adults and retirees could also be in the market for a new home. Currently, buying a house can be tough due to low inventory and high mortgage rates. However, waiting for the market to change isn’t a choice for some seniors.
Here we will discuss what older buyers need to know when they’re looking to get a mortgage.
Can You Get a Mortgage as a Senior?
You can get a home loan as a senior, no matter your age. The Equal Credit Opportunity Act prohibits age discrimination when trying to secure a home loan. Lenders will look at a variety of factors – such as income and credit score – to determine if you qualify for a mortgage, but age doesn’t play a role.
Is it Hard For Seniors to Get a Mortgage?
While senior citizens may obtain a mortgage, there are some hurdles to be aware of. One primary concern for lenders is income verification. Retired seniors may not have a regular paycheck, making it harder to prove a steady income. Therefore, your income might need to come from a mix of social security, pensions, and retirement plans.
Another issue is the correlation between the applicant’s age and the loan term. Legally there’s no maximum age for a mortgage due to the Equal Credit Opportunity Act, so technically, a 65-year-old could get a 30-year mortgage. But lenders might still be hesitant about the feasibility of repayment over a long-term loan by older applicants. Some lenders may want a co-borrower on the loan if age is a concern, so another individual is legally tied to the mortgage if the primary borrower passes away before the mortgage is paid off.
While seniors might have significant assets, lenders might be hesitant if the assets are not easily liquidated. For instance, large amounts tied up in retirement accounts may not be considered as readily available for mortgage payments.
» MORE: See today’s refinance rates
Retiring With a Mortgage
The latest data from the U.S. Census Bureau shows that 19% of homeowners 65 and older are still making monthly mortgage payments. Though many seniors have always hoped they would be able to retire without a mortgage, chances are good that you will still have one.
If you know that you will still be paying your mortgage after retirement, start planning now for strategies that will keep it manageable while you are on a fixed income.
If you have a lot of savings or a huge retirement fund, you may have wondered whether or not you should just use that money to pay off your mortgage. Using funds from your 401K or from your retirement funds almost never pays off, as you will have to pay taxes and possible early withdrawal penalties.
However, if you have savings and investment accounts that are earning less than you are paying on your mortgage, then it probably makes sense to use that money for your mortgage. For example, if your mortgage rate is 6.3%, yet your investment account only gives you 4%, you are probably better off paying off some or all of your mortgage.
Another thing to think about is that your mortgage payments are usually tax deductible. Consult your accountant to see if it makes more sense to keep paying the mortgage so that you can continue to take advantage of the tax deduction.
You can also refinance to a lower rate or to a new mortgage with a longer term that spreads the payments out and brings the monthly costs down. This can save you a lot of money every month in the short run but will extend the length of your loan and add on finance charges in the long run. Again, this is the kind of thing to run by your financial advisor first.
A third option, if you have the capital, is to purchase an annuity that produces regular payments that will cover the mortgage. Roll over a 401K or IRA into an annuity that lasts until the end of the mortgage term and avoid a big tax bill. Annuities are a famously tricky product though, so again, discuss this thoroughly with your tax advisor.
Mortgage Options For Seniors
Seniors have several mortgage options available, tailored to accommodate their unique financial situations and retirement income sources. Here are the key mortgage options for seniors:
1. Conventional Loans: These loans are a popular choice and are often available with a low down payment. Lenders generally consider Social Security income to be reliable, allowing seniors to qualify. Good credit scores and low debt-to-income ratios are typically required for favorable terms.
2. FHA Loans: Backed by the Federal Housing Administration, FHA loans are available to seniors with less stringent eligibility requirements than conventional loans. They require a down payment (usually around 3.5% if the credit score is above 580) and mortgage insurance premiums.
3. VA Loans: For Veterans or spouses of Veterans, VA loans come with benefits such as no down payment and no private mortgage insurance. They are a viable option for retired military personnel.
4. USDA loans: Targeted at homebuyers in rural areas, USDA loans often require no down payment and have flexible credit requirements. However, there are additional income limitations.
5. Reverse Mortgage Loans: Specifically designed for seniors, reverse mortgages allow seniors to access the equity in their home. A borrower must be at least 62 years of age to qualify. These loans convert home equity into cash, with the loan balance increasing over time.
6. Home Equity Line of Credit (HELOC): HELOCs are a revolving line of credit using the home’s equity as collateral. It requires a good credit score and a low debt-to-income ratio. The interest rates are generally variable. It’s important to make sure you have enough home equity and how much credit you can afford.
7. Home Equity Loans: Similar to HELOCs, home equity loans use the home’s equity as collateral but with fixed payments over a set term. They are ideal for large expenses and require a good credit score and low debt-to-income ratio.
8. Cash-Out Refinance: This involves replacing the existing mortgage with a new, larger loan and receiving the difference in cash. Seniors need substantial home equity and may face higher scrutiny from lenders to qualify for a cash-out refinance.
9. Asset Depletion Loans: These loans are suitable for seniors with significant assets. Lenders allow the conversion of these assets into income to qualify for the loan.
10. Bank Statement Loans: For seniors who cannot document income on tax returns but receive regular large deposits, bank statement loans use deposit history as a basis for income qualification.
Each of these options caters to different aspects of a senior’s financial situation, whether it’s tapping into home equity, utilizing retirement assets, or accommodating a fixed income. It’s important for seniors to carefully evaluate these options in light of their individual financial circumstances and long-term plans.
Which Type of Mortgage is Typically Offered to Seniors?
Most often, reverse mortgage loans are the go-to option for seniors. According to the Federal Housing Admission’s latest report to Congress, the average age of reverse mortgage borrowers rose to approximately 74.84 years in 2023 compared to 74.29 years in 2022.
A reverse mortgage is like a mortgage in reverse. Instead of getting a lump sum that is used to pay for a home, a lender gives you monthly payments for your existing home for a fixed period. At the end of that period, the house is then either sold by the lender or refinanced by a family member.
Our reverse mortgage calculator is a great resource to see if this loan is a viable option for you. However, it’s crucial for seniors to consult with financial advisors or counselors to assess whether a reverse mortgage is the right financial decision for their specific circumstances.
How to Qualify for a Home Loan When Retired
If you decide that applying for a new mortgage loan – whether to purchase a residence or a refinance to replace an existing home loan – makes financial sense, here’s what you need to qualify.
First, you’ll need enough income coming in each month. Lenders today generally want your monthly debts, including your new mortgage payment, to equal no more than 43% of your gross monthly income.
Most people rely on their jobs for the majority of their monthly income. If you’re retired, you can’t do that. You can, though, use other sources of income. This can include Social Security payments, royalties, rental income from apartments you own, pension payments, or the capital gains you receive from investments.
You’ll also need a solid credit score. Most lenders consider a FICO credit score of 740 or higher to be an excellent one. If your FICO score is under 620, you’ll struggle to qualify for a mortgage loan at an affordable interest rate.
If your income and credit score are high enough, you should be able to qualify for a mortgage loan no matter how old you are.
The Bottom Line
It’s hard to put together a guide that covers every senior. After all, we’re talking about an age span of 40 years or more. Still, if there’s one thing that seniors of any age should do, they should plan for the future!
- If you currently own a home that is too big for your needs, downsize while you still can. Do it for your own peace of mind and finances, but also do it so that you can put some of the capital that you have invested in your home to work.
- If you find yourself in need, a reverse mortgage can be a great asset—if you get good advice and use the money wisely.
- If you are entering retirement with a mortgage, do what you can to make it more affordable with a refinance or another payment strategy.
The decisions that you make about your home and your mortgage will have long-lasting effects on your life and on those close to you. Your home can be one of your greatest financial assets. Learn to manage the investment, and you will be able to take care of yourself and maintain your independence and health well into the future.