More and more seniors are taking out new home loans
Many retirees no longer see paying for their home as part of their goals.
More and more Americans are
take advantage of the low
Interest rates and
Tax breaks that come with a mortgage.
If you shrink the size, you may get a mortgage instead of buying the new place with cash. Or you can refinance for lower payments instead of paying off part of your balance.
However, there are certain challenges
that comes with a retired home loan. Here's what you should know:
before you start.
Review Your Mortgage Options (December 18, 2020)
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Can you Get one
30 Years Home Loan As A Senior?
First, if you have the means
No age is too old to buy or refinance a home. The Equal Credit Opportunity Act prohibits lenders from blocking or
discouraging someone from an age based mortgage.
If we base eligibility on age alone, a 36 year old and a 66 year old have an equal chance of qualifying for a mortgage loan.
Criteria remain the same: income, assets, debts and credit.
However, it can be more difficult to meet
these criteria in retirement – especially when it comes to income.
Seniors should expect more rigorous scrutiny when applying for a mortgage loan. You will likely need to provide additional documentation proving your various sources of income (retirement accounts, social security, pension, etc.).
More tires may need to be jumped
by. But if you have the money to make payments, you should be able to
qualify for a new home loan or refinance your current home.
Review Your Home Loan Options (December 18, 2020)
Challenges for Retirees and Seniors in Obtaining a Mortgage
There is no maximum age
Limit on applying for a mortgage, seniors and retirees can
find it harder to qualify for a home loan.
No regular income
Mortgage lenders need to
Make sure you can repay a home loan before they give you loans.
Usually that means looking
for monthly income based on W2 tax forms. But most seniors don't have a regular guest
monthly cash flow to display the lender.
In retirement, lenders often consider 401 (k) s, IRAs, and other retirement account distributions for
They also take into account social security income, pension and investment income.
However, borrowers must demonstrate that these funds are fully accessible to them at the time of their application. You cannot qualify based on retirement accounts or annuities unless you can pull out of them without penalties.
And retirees have to show
that their retirement accounts can be used to finance a mortgage
Top of normal life
Costs like food and supplies.
Income ends under 3 years (retirement)
Home buyers who haven't yet retired but want to retire
soon another catch may hit in the mortgage application process.
When you buy or refinance a home, mortgage lenders need it
The verification of your source of income will take at least 3 years after the loan
Someone who retires in a year or two would not do this
ongoing income requirement.
In that case, they wouldn't qualify for a mortgage or
Refinance Loans – No matter what your credit rating or how much money you are
have hidden in investments and retirement accounts.
The easiest solution to this problem? Don't tell you
Lender you plan to retire.
There is nothing on your payroll to point you to a lender
About retirement plans, they have every reason to believe that your income will
There is also no guarantee that you will need it when
planned. Many people change their plans based on the current economy, theirs
Investments or their desire to keep working.
However, you need to be absolutely sure that you can
Make mortgage payments with the income you have in retirement.
When you find yourself in a situation where you received one
Buyout for retirement or your employer informs your lender about retirement plans.
You may not be able to qualify for a new mortgage.
If so, you may have to wait until you have retired and withdrawn from your retirement account to qualify based on your assets, not your income.
Access to pension funds
Most underwriting guidelines have a defined expiration date for distributions from 401 (k) s, IRAs, or other retirement accounts. This is because the asset is depleted.
As such, borrowers who derive
Income from such sources must be able to document that this is expected
continue for at least three years from the date of your mortgage application.
In addition, individuals typically cannot withdraw funds from 401 (k) accounts before the age of 59 without penalty.
Because of this the retiree
must prove unrestricted access to these accounts and without penalty.
If the accounts are made up of stocks, bonds, or mutual funds, these assets are considered volatile.
Because of this, lenders only use 70 percent of the value in retirement accounts to determine how many distributions remain.
Check Your Home Loan Eligibility (December 18, 2020)
Mortgage solutions for seniors
As mentioned above, seniors
can easily overcome the home buying income barrier when they have money in
Asset, retirement or investment accounts.
In fact, there are programs specifically designed to help seniors and retirees finance their homes.
An asset depletion loan is a type of mortgage that is used to buy and refinance homes with no regular income.
Allow mortgages for asset depletion
Borrowers who wish to qualify for a home loan based on their cash, rather than on the basis of a
continued source of income.
In this case the sum is the
The borrower's assets are divided into a monthly "income" that is used
determine if they can afford ongoing mortgage payments.
For example, if you have $ 1 million in savings, the lender divides that amount by 360 (the number of months on most mortgages) to make an income of about $ 2,700 per month.
You need a significant amount in
Only certain types of funds may count towards your qualified "income" for an asset exhaustion loan. These typically include:
Checking and Savings AccountsMoney Market AccountsCertificatesInvestments such as stocks, bonds, and mutual funds401 (k) and IRA retirement accounts
No matter if
Income has a defined expiry date and lenders require retirees to document this
regular and continued receipt of their qualified income.
This is usually done using one or more of the following methods:
Letters from the organizations that provide the income Copies of the pension premium letters Copies of the signed federal income tax returns 1099 forms Proof of current receipt of account statement deposits
For retirees who are not earning an income, an asset exhaustion loan can be a great way to qualify for a new home loan or refinance.
Mortgages for seniors on social security
Social security income for retirement or long-term disability can usually be used to qualify for a mortgage loan.
That means you can usually refinance with Social Security income – as long as you are currently receiving it.
SSI would likely be counted along with pension funds and other cash to calculate the borrower's total qualified "income".
Since SSI is usually not subject to tax, it can also be "extrapolated".
This means that the lender can increase the qualifying amount by 10-25%.
This increases the amount that a senior with social security income is allowed to borrow.
In order for a lender to have social security income counted towards your mortgage, this must be documented in an SSA premium letter or Proof of current receipt.
When the borrower draws socially
Security income from someone else's job record that they need
Include the SSA Award letter and Proof of current receipt as well
Verification that the income will last for at least 3 years.
Check Your Social Security Mortgage Eligibility (December 18, 2020)
Fannie Mae Senior Buying a Home
Both Fannie Mae and Freddie Mac who
Two massive entities that regulate the real estate market have policies that allow it
Eligible retirement assets that can be used to qualify under certain conditions.
Fannie Mae lets in lenders
Borrower's retirement assets to qualify for a mortgage.
If the borrower is already using a 401 (k) or other retirement income account, the borrower must provide evidence that the income received from that asset will persist for at least three years.
If the borrower is not
If the lender is already using the asset, they can calculate the income stream of that asset
Freddie Mac retirement home
Likewise Freddie Mac
Lending guidelines have been changed to make it easier for borrowers to qualify for lending
Mortgage when they have limited income but substantial assets.
The rule allows lenders
Take into account IRAs, 401 (k) s, flat-rate retirement account distributions, and proceeds
from selling a business to qualify for a mortgage.
All IRA and 401 (k) assets
must be fully vested and “fully accessible to the borrower, not
subject to a withdrawal penalty and currently not to be used as a source for
Buy a home with investment
As mentioned, though
Retirement accounts are made up of stocks, bonds, or mutual funds that lenders can only
Use 70 percent of the value of these accounts to determine how many
Buy a home with a co-signer
One of the quickest, easiest solutions for seniors struggling with income qualification issues is to add a co-signer.
Some parents are retired
To do this, they add their children to their mortgage application.
A child with substantial
Income can be factored in alongside the parent so they can even buy a house
without regular cash flow.
Fannie Mae has one
Increasingly popular new co-signer loan program. The “HomeReady” mortgage program enables
Income from non-borrowing household members such as adult children
Buy a home with non-taxable
Another helpful solution for
Seniors count non-taxable income.
Social security income, e.g.
Example is usually not taxed. Most lenders can increase the amount
Income by 25 percent, also known as "gross profit", when calculated on a monthly basis
Unfortunately only because a
The lender is allowed to extrapolate the non-taxable income. This does not mean that it is necessary.
Additionally, they can choose to get a lower percentage like 10 or 15
Talk to your lender about this
how to calculate non-taxable income.
Review Your Home Loan Options (December 18, 2020)
One that is growing in popularity
The mortgage product specially designed for seniors is the reverse mortgage.
The reverse mortgage is
officially known as Home Equity Conversion Mortgage or HECM and is supported by
the Federal Housing Administration (FHA).
Reverse mortgages allow seniors to access their home equity through monthly payments to the retiree. The interest is then accrued until the loan is due.
Over time, the remaining amount owed
on the house increases while the amount of equity decreases.
With a reverse mortgage one
The borrower must be at least 62 years of age or older to qualify.
This type of loan is not for everyone. Another type of home product – like a HELOC, a home loan, or a withdrawal refinance – is often a better choice for accessing cash.
Learn more about who should and shouldn't be considering a reverse mortgage here. Or visit the FHA's resources page on HECM Reverse Mortgages.
When does it make sense to get a home loan than
Many retirees and seniors are
opting for a mortgage rather than paying back the loan balance or buying a mortgage
new home with cash.
This can unlock savings for you
other uses. Necessities like food, transportation and long term care are included
among the highest spending for seniors.
Other than the release of assets,
There are a number of reasons seniors are considering financing a new home
reduction – Empty nests can be scaled down to minimize square footage, maintenance and mortgage costsPhysical challenges – Cleaning and repairs can be physically demanding. Many seniors buy a new home to cut maintenanceSupplement of fixed income securities – More and more seniors are finding it difficult to live on their fixed income. Retirees can choose to sell or refinance their homes, fund a new home purchase, and take advantage of that Equity paid out to supplement their incomeMoving to a new area – According to a survey, as many as 40 percent of retirees leave their home state in search of better weather, relaxation, cheap taxes, and other perks
If any of the above applies
You might find it worthwhile to finance a retirement home.
Review Your Home Loan Options (December 18, 2020)
Example: qualifying for a Retired Asset Depletion Loans
Let's take as an example
Retired Michael has $ 1,000,000 in his 401 (k) and he hasn't touched it.
Michael is not yet 70½ years old. At this age, the IRS requires account holders to make the required minimum payouts of 401 (k) s or more.
He lives on income from social security along with income from a Roth IRA.
To qualify Michael for one
On the mortgage, the lender uses 70 percent of the 401 (k) balance or $ 700,000 less
his down payment and closing costs.
Note: With Fannie Mae, borrowers can also use vested assets from retirement accounts for down payment, closing costs, and provisions.
Let's put that down
Payment and closing costs, leaving Michael with $ 630,000.
Assuming a 30 year mortgage,
That $ 630,000 amount can then be used to incrementally pay off his mortgage
the next 360 months. That would give him $ 1,750 a month to invest in an apartment
Amount in 401 (k) = $ 1,000,000 Qualifying 401 (k) Funds (70%) = $ 700,000 Funds Remaining After Down Payment and Closing Costs = $ 630,000 Monthly Mortgage Budget ($ 630,000 / $ 360) = $ 1,750
Although it's not a separate one
Loan type, lenders sometimes call this an "asset depletion loan" or "asset"
Loan. "And borrowers can still count income from other sources if they do
Use assets to qualify.
Michael could use the asset depletion method from his pristine 401 (k) combined with the income he already receives from Social Security and his Roth IRA to qualify and borrow as much as possible.
He doesn't actually have to
Dive into his 401 (k) to pay the mortgage, but this calculation shows
his lender that he could rely on his 401 (k) to pay the mortgage when necessary.
Find the best mortgage for you
Most mortgage lenders have loan programs that allow seniors to buy a home or refinance their current home.
However, these are not all lenders
Experience in issuing mortgages to retirees.
Before choosing a lender,
Be sure to ask some screening questions. You want to know how the lender is
qualifies the retirement income as well as the calculation of the qualified income
Asked a few questions in advance
can help you find an experienced lender to process your application and get you back
the best deal.
Check your new plan (December 18, 2020)