Home Loans For Seniors: Everything You Need To Know
The dream of owning a home has no age limit. Whether someone has been thinking about owning their own home for a long time, wanted to buy their first vacation home or is interested in a refinance for the house they raised their family in, these dreams can all be attainable for seniors, including seniors who are retired. While more steps may be involved in some cases, home loans for seniors can make lifelong dreams a reality.
With this in mind, let’s take a deep dive into the different mortgage options available for seniors and retirees.
Are There Mortgage Loans For Seniors?
There’s no age limit on who can get a new mortgage to buy a home or refinance an existing home loan. In fact, the Equal Credit Opportunity Act prohibits discrimination for any aspect of a credit transaction. This includes the prohibition of discrimination based on age as long as the borrower meets the minimum age for loan approval.
Seniors will need to meet the same loan requirements when applying for a mortgage – including debt-to-income and credit score requirements – as any other borrowers. Retired seniors may have different documentation to provide than those that are actively employed – generally speaking, this would include an award letter or most recent 1099 and bank statements.
When Does It Make Sense For Seniors And Retirees To Get A Mortgage?
While every senior or retiree’s situation is different, here are some scenarios where it makes sense for seniors and retirees to apply for a home purchase loan or a refinance loan.
- Downsizing: You could take out a mortgage to downsize your living quarters. Downsizing could lower your mortgage and monthly home insurance costs and utility bills as well as require less home maintenance.
- Moving to a new state or area: Relocating is one of the most common reasons for getting a mortgage.
- Attempting to reduce monthly mortgage payments: A lower monthly payment – which may be possible by moving to a more affordable home or refinancing – can make a big difference for seniors who have a mortgage.
- Consolidating debt: Debt consolidation involves taking out a loan to pay off other debts by rolling those debts into a single loan and payment. For seniors or retirees who own a home, a cash-out refinance could help consolidate their
Potential Challenges When Getting A Home Loan For Seniors
The Equal Credit Opportunity Act helps senior borrowers from being discriminated against when getting a home loan, but seniors who apply for a mortgage or refinance may face challenges that not all borrowers do.
One challenge might be a lack of regular income, which can raise a red flag since lenders need to ensure you can pay back your loan. Because retirees don’t often have a monthly income-based W-2 tax form to show and may not have consistent cash flow, they’ll need other verification that proves they can repay a home loan.
Fortunately, lenders can consider paperwork from retirement accounts, such as a 401(k) or an IRA. However, accessing the funds within those retirement accounts before a certain withdrawal date may come with a penalty. If the funds aren’tfully accessible when a senior is applying for a home loan, they can’t qualify for a loan based on those retirement accounts. Rather, the money must be accessible without penalties.
For those who are planning to retire soon and need a home loan, mortgage lenders typically won’t consider an income unless the borrower can prove that it should continue at least 3 more years. If someone retiring in the next year or two is planning to apply for a home loan, they need to consider this before applying.
Home Loans For Seniors
Retirees and seniors have plenty of options for home loans. Let’s review some that may be a good fit for seniors, but keep in mind the specific challenges we’ve discussed.
A conventional loan is any loan that isn’t ensured by the federal government but is instead originated by a private mortgage lender. These lenders can include credit unions, banks or other financial establishments. Conventional loans can be either conforming or nonconforming. A conforming loan can be purchased by Fannie Mae or Freddie Mac, while nonconforming loans can’t.
Typically, it makes the most financial sense to make a larger down payment of at least 20% for a conventional loan so you won’t be required to pay private mortgage insurance (PMI).
Home Equity Loan
A home equity loan, often called a second mortgage, is a loan that allows you to use your home equity as collateral to borrow money. You secure the financing of the loan with the value of your home minus the amount you owe, which means the lender can ultimately take your home if you can’t pay the loan back. It’s important to know all the risksinvolved before using your home as collateral.
Home equity loans are paid off with monthly payments, as with a primary mortgage.
Home Equity Line Of Credit (HELOC)
A home equity line of credit (HELOC) is a type of home equity loan that serves as a line of credit. A HELOC is a great option for borrowers who need funds for home improvement projects or need more time to pay down debt. A HELOC works by allowing homeowners to access their home’s equity and use it as money to pay for expenses.
A HELOC is a straightforward way to access revolving credit, but it’s important to review your financial situation as a senior before settling on this option.
A reverse mortgage is perhaps the loan most tailored for senior and retired borrowers. It’s a loan for homeowners aged62 and up to turn a portion of their home equity into cash. If senior borrowers need to supplement their retirement funds, lower their monthly mortgage payments or even pay for in-home care, a reverse mortgage can be extremely helpful.
Note that the borrower must have enough equity in their home to be eligible for a reverse mortgage loan. The loan mustalso be for the borrower’s primary residence, and the borrower must go through a financial assessment to qualify for a reverse mortgage.
Refinance Programs For Seniors
Seniors and retirees can also refinance as a way to improve their financial situation. Whether you want a lower interest rate or an adjusted loan term, refinancing can sometimes give borrowers some financial relief.
Next, we’ll look at some refinance programs for seniors.
A rate-and-term refinance is the most traditional type of refinance, and it can help seniors modify their existing mortgage to achieve better loan terms. With a rate-and-term refinance, borrowers can switch their existing loan for a new agreement with better numbers.
For example, if interest rates have improved since the time you secured the loan, a rate-and-term refinance may be a great option because it can lower your interest rate and offer a shorter term or a smaller monthly payment.
A cash-out refinance can help convert your home equity into tangible money. Seniors have cash-out refinance options through different programs, such as an FHA or VA cash-out refinance. However, a cash-out refinance ultimately increases how much you owe on your home, so it may not be the perfect option for seniors or retirees who want to pay off their mortgage sooner rather than later.
If you’re comfortable making your mortgage payments every month and need cash for something, a cash-out refinance could be useful.
A cash-in refinance is the opposite of a cash-out refinance, as it allows borrowers to put more money into a home to build their home equity. Essentially, it gives borrowers a chance to make another down payment.
This refinance option is ideal for senior borrowers who want to have a better term, a lower interest rate or a smaller principal balance. If you’re worried about paying off a home before or during retirement, a cash-in refinance can help youachieve that goal in less time.
How To Qualify For A Mortgage As A Senior Citizen
Fortunately, the challenges that senior borrowers sometimes face while seeking a mortgage don’t make it impossible to get one. To qualify for a home loan as a senior or retired borrower, you’ll need to provide documentation that serves as proof of income.
Here are some common income sources for seniors, along with the paperwork you could present to a lender.
- Withdrawal from retirement accounts: Federal tax returns or asset statements
- Interest, rental property or dividend income: Federal tax returns, including IRS Form 1040
- Annuities: Federal tax returns, 1099s or annuity contracts
- Social Security: Social Security award letter, 1099s or benefit statements
- Pension: Retirement award letter or 1099s
To compensate for some seniors’ lack of a consistent paycheck, lenders may need bank statements to show that payments are being deposited into a senior borrower’s account.
Generally speaking, though, seniors and retirees face the same requirements as other borrowers. Lenders will review a senior applicant’s income, credit score, assets, debt-to-income ratio (DTI) and the property type they’re pursuing to determine if they’re a good fit for a loan.
The Bottom Line
Retirees and other seniors who live on a fixed income still have an array of options for financing or refinancing a mortgage. If you’re a senior and are interested in owning a new home, building home equity or consolidating debt, it’s essential to review your finances and long-term goals so you can select the best options for you.
If you’re ready to explore home loans for senior citizens, get started on a mortgage application today and connect with one of our Home Loan Experts.