Can you get a 30-year home loan as a senior?

Craig Berry
The Mortgage Reports contributor

Why more seniors are considering new mortgages

Many retirees no longer see paying off a home as part of their goals.

More and more Americans are taking advantage of the low interest rates and tax breaks that come with having a mortgage.

If you’re sizing down, you might get a mortgage instead of buying the new place with cash.

Or, you might refinance for lower payments rather than paying off a chunk of your balance.

Considering financing a home in retirement? Check rates to see whether this strategy makes sense for you.

Shop mortgage rates here (Apr 5th, 2020)

In this article:

Can you be “too old” to get a mortgage?

First, if you have the means, no age is too old to buy a house. The Equal Credit Opportunity Act prohibits lenders from blocking or discouraging anyone from a mortgage based on age.

The Equal Credit Opportunity Act prohibits lenders from discouraging consumers from taking out a mortgage based on age.

If we’re basing a home purchase on age alone, a 36-year old and a 66-year old have the same chances of buying a home. The qualifying criteria remain the same: income, assets, credit, etc.

So as long as you qualify for a new mortgage based on your financial portfolio, you can’t be denied the loan — regardless of your birth date.

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Challenges retirees and seniors face when buying a home

While there is no maximum age limit for applying for a mortgage, senior citizens may find it is tougher to qualify for a home loan.

The primary hurdle for most seniors typically involves having the monthly income and assets to qualify. But there may be other challenges to overcome too.

No regular income

Mortgage companies need to verify that you can pay a home loan back before they’ll lend to you.

Usually, that means looking at monthly income based on W2 tax forms. But most seniors won’t have a regular monthly cash flow to show lenders.

So for those in retirement, lenders will often consider 401(k)s, IRAs, and other retirement account distributions for mortgage qualifying.

For those in retirement, lenders will often consider 401(k)s, IRAs, and other retirement account distributions for mortgage qualifying.

However, sometimes the challenge is proving these assets are fully accessible to the borrower, and not currently being used as a source of income.

Retirees need to show that their retirement accounts can be used to fund a mortgage on top of regular living costs like food and utilities.

Accessing retirement funds

Another important note regarding assets is this:

Most underwriting guidelines consider distributions of 401(k)s, IRAs or other retirement accounts to have a defined expiration date. This is because they involve depletion of the asset.

As such, borrowers who derive income from such sources must be able to document that it is expected to continue for at least three years after the date of their mortgage application.

In addition, individuals typically cannot withdraw money from 401(k) accounts before age 59 ½ without penalty.

The retiree must prove unrestricted access to their retirement accounts, without penalty.

For this reason, the retiree must prove unrestricted access to these accounts, and without penalty.

Finally — if the accounts consist of stocks, bonds, or mutual funds, those assets are considered volatile.

For this reason, lenders only use 70 percent of the value in retirement accounts to determine how many distributions remain.

Budgeting for homeownership and maintenance

There are more hurdles for seniors beyond just getting qualified. As is the case with any age group, purchasing a home adds more responsibility beyond the monthly mortgage payment.

You’ll need to budget for property taxes, homeowners insurance, and home owners association fees if applicable.

Homeowners are also on the hook for maintenance and repairs to the property. Or for paying someone else to take care of those things.

Ultimately, when it comes to financing a home purchase, seniors should understand that adding a mortgage amplifies financial risk.

Even those with high net worth can lose out by borrowing too much if the house fails to increase in value.

Potential home buying solutions for seniors

As mentioned above, seniors can easily overcome the income hurdle for home buying if they have funds in assets, retirement, or investment accounts.

In fact, there are programs specifically designed to help seniors and retirees finance new home purchases.

Reverse mortgages

One increasingly popular mortgage product specifically designed for seniors is the reverse mortgage.

Reverse mortgages allow seniors to access the equity in their home via monthly payments made to the retiree. The interest is then deferred to when the loan matures.

Over time, the balance owed on the house rises, while the amount of equity decreases.

With a reverse mortgage, one borrower must be at least 62 years of age or older to qualify.

>> Related: Who should consider a reverse mortgage?

Fannie Mae senior home buying program

Both Fannie Mae and Freddie Mac, the two massive entities that regulate the housing market, have policies that allow eligible retirement assets to be used to qualify under certain conditions.

Fannie Mae lets lenders use a borrower’s retirement assets to help them qualify for a mortgage.

If the borrower is already using a 401(k) or other retirement account for retirement income, the borrower must demonstrate that the income received from that asset is going to continue for at least three years.

If the borrower is not already using the asset, the lender can compute the income stream that asset could offer.

Freddie Mac senior home buying program

Similarly, Freddie Mac changed its lending guidelines to make it easier for borrowers to qualify for a mortgage when they have limited incomes but substantial assets.

The rule allows lenders to consider IRAs, 401(k)s, lump sum retirement account distributions, and proceeds from the sale of a business to qualify for a mortgage.

Any IRA and 401(k) assets must be fully vested, and must be “entirely accessible to the borrower, not subject to a withdrawal penalty, and not be currently used as a source of income.”

Verify your home buying eligibility here (Apr 5th, 2020)

Buy a home with investment money

As mentioned earlier, when retirement accounts consist of stocks, bonds or mutual funds, lenders can only use 70 percent of the value of those accounts to determine how many distributions remain.

Regardless of whether the income has a defined expiration date, lenders require retirees to document the regular and continued receipt of their qualifying income.

This is typically done using one or more of the following: letters from the organizations providing the income, copies of retirement award letters, copies of signed federal income tax returns, 1099 forms, or proof of current receipt via bank statement deposits.

Buy a home with a co-signer

One of the quickest and easiest solutions for seniors who are having trouble income-qualifying is to add a co-signer.

Some retired parents are doing this by adding their children to their mortgage application.

A child with substantial income can be considered alongside the parent, allowing them to buy a home even with no regular cash flow.

Fannie Mae has an increasingly popular new loan program for co-signers. The “HomeReady” mortgage program allows income from non-borrowing household members, like adult children, to be counted.

>> Related: Benefits of buying a home with a co-signer

Buy a home with non-taxable income

Another helpful solution for seniors is when it comes to non-taxable income.

Social Security income, for example, is typically not taxed. Most lenders can increase the amount of this income by 25 percent, also known as “grossing up”, when calculating monthly income.

Unfortunately, just because a lender is allowed to gross up non-taxable income, it doesn’t mean they have to. Further, they may choose to gross up by a smaller percentage, such as 10 or 15 percent.

Speak to your lender about how they calculate non-taxable income.

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When does it make sense to get a home loan as a senior?

Many retirees and seniors are opting to have a mortgage instead of paying off their loan balance or buying a new home with cash.

This can free up savings for other uses. Necessities such as food, transportation, and long-term care are among the highest expenditures for seniors.

Other than freeing up assets, there are a number of reasons seniors may be considering financing a new home purchase.

  • Sizing down — Empty nesters may size down to minimize square footage, maintenance, and mortgage costs
  • Physical challenges — Cleaning and repairs can become physically taxing. Many seniors purchase a new home to cut down on upkeep
  • Supplementing fixed income — More and more senior citizens are finding it difficult to live on their fixed incomes. Retirees may decide to sell or refinance their homes, finance a new home purchase, and use the equity cashed out to supplement their income
  • Moving to a new area — According to one survey, as many as 40 percent of retirees are venturing out of their home state looking for better weather, recreation, favorable taxes, and other benefits

If any of the above applies to you, it might be worth it to consider financing a home in retirement.

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Example: How to buy a home in retirement with an “asset depletion loan”

As an example, suppose retiree Michael has $1,000,000 in his 401(k) and he has not touched it.

Michael is not yet 70½, the age at which the IRS requires account owners to start taking required minimum distributions from 401(k)s. He is living off Social Security income, along with income from a Roth IRA.

To qualify Michael for a mortgage, the lender uses 70 percent of the 401(k) balance, or $700,000, minus his down payment and closing costs.

Note — Fannie Mae also allows borrowers to use vested assets from retirement accounts for the down payment, closing costs, and reserves.

Let’s say that after down payment and closing costs, Michael is left with $630,000.

Assuming a 30-year mortgage, that amount of $630k can then be used to gradually pay for his mortgage over the next 360 months. That would give him $1,750 a month to put toward a housing payment.

  • Amount in 401(k) = $1,000,000
  • Qualifying 401(k) funds (70%) = $700,000
  • Funds left after down payment and closing costs = $630,000
  • Monthly mortgage budget ($630K / 360) = $1,750

Though it is not a separate loan type, lenders sometimes call this an “asset depletion loan” or “asset based loan.” And borrowers may still count income from other sources when they use assets to help them qualify.

Michael could use the asset depletion method from his untouched 401(k) combined with the income he is already receiving from Social Security and his Roth IRA to qualify and borrow as much as possible.

He does not actually have to start dipping 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 if need be.

Find the best mortgage lender

Most mortgage lenders have loan programs that make it possible for seniors and retirees to buy a home.

However, not all lenders are experienced in issuing mortgages to retirees.

Prior to choosing a lender, make sure to ask a few screening questions. You’ll want to know how the lender qualifies retirement income, as well as how they calculate qualifying income from assets.

A few questions asked upfront can help you find an experienced lender to process your application and get you the best deal.

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