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.
When seniors apply for a mortgage, lenders look at the same criteria as they do for any other borrower, including:
- Credit history and score
- Debt-to-income (DTI) ratio
- Income and other assets
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.
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.