More seniors are taking out new home loans
Even in a rising rate environment, many retirees and seniors are still interested in purchasing a vacation home, downsizing to a smaller property, or tapping their home equity. In other words, paying off a mortgage loan is not part of every homeowner’s financial goals.
If you’re sizing down, you might get a mortgage instead of buying the new home with cash. Or you might refinance for lower payments rather than paying off a chunk of your loan balance.
Luckily, there are plenty of mortgages for seniors on Social Security today. Here’s what to know.
In this article (Skip to…)
- Senior mortgages
- Mortgage with Social Security
- Senior mortgage options
- Example scenario
- Challenges
- Should you get a mortgage?
Can a senior get a mortgage?
Yes, seniors can get mortgages. No age is too old to buy or refinance a house, if you have the means. The Equal Credit Opportunity Act prohibits lenders from blocking or discouraging anyone from a mortgage based on age.
If we’re basing eligibility on age alone, a 36-year-old and a 66-year old have the same chances of qualifying for a mortgage loan.
The qualifying criteria remain the same:
- Loan-to-value ratio
- Income
- Assets
- Debt-to-income ratio
- Credit score
However, it can be tougher to meet those criteria in retirement, especially when it comes to income. Seniors on social security should expect stricter scrutiny when applying for a mortgage loan. You’ll likely have to provide extra documentation supporting your various income sources.
What counts as income for a mortgage loan?
When applying for a mortgage loan, lenders typically look at several types of income to determine your ability to repay the loan. Here are some examples of income that may be considered:
- Retirement income: If you receive retirement income, including Social Security, 401(k), traditional IRA, Roth IRA, long-term disability, pensions, or annuities, lenders may consider this as part of your overall income
- Investment income: If you have investment accounts, such as stocks or bonds, lenders may consider the income you receive from these investments as part of your overall income
- Salary or wages: This is the most common type of income and includes the regular pay you receive from your employer
- Self-employment income: If you’re self-employed, lenders may look at your business income as part of your overall income
- Bonuses and commissions: If you receive bonuses or commissions as part of your job, lenders may consider this as part of your income
- Rental income: If you own rental properties, lenders may consider the rental income as part of your overall income
- Alimony and child support: If you receive alimony or child support payments, lenders may consider this as part of your income
It’s important to note that lenders may have specific requirements for each type of income, and some types of income may be considered more reliable than others. For example, lenders may require documentation of self-employment income or rental income, and may look at the stability and consistency of your income sources.
How can seniors on social security get a mortgage?
Social Security income (SSI) for retirement or long-term disability can typically be used to help qualify for a mortgage loan. That means you can likely buy a house or refinance based on Social Security benefits, as long as you’re currently receiving them.
- SSI should be counted along with retirement funds and other liquid assets to calculate the borrower’s total qualifying “income”
- Since Social Security income is typically non-taxable, it can also be “grossed up.” That means the lender can increase the qualifying amount by 10% to 25% and help you qualify for a larger monthly mortgage payment
- For a lender to count Social Security income toward your mortgage, it will need to be documented via an SSA Award letter or proof of current receipt
If the borrower is drawing Social Security income from another person’s work record, they’ll need to provide the SSA Award letter and proof of current receipt, as well as verification that the income will continue for at least three years.
Mortgages for seniors on Social Security
Retirees and seniors have plenty of mortgage loan options. In fact, there are programs specifically designed to help seniors and retirees finance their homes.
As mentioned above, seniors can easily overcome the income hurdle for mortgage qualifying if they have sufficient assets, retirement savings, or investment accounts. Here are some of the commonly found home loans for seniors on Social Security, or other income sources.
1. Asset depletion loans
An asset depletion loan is a type of mortgage designed for home buying and refinancing without regular income.
Technically, this is the same as a traditional mortgage. The only difference is the way a mortgage lender calculates your qualifying income. This loan is a good option for retired people. But anyone is eligible if they have enough cash reserves and the proper accounts.
Asset depletion mortgages allow borrowers to qualify for a home loan based on their liquid assets, rather than a continuing income source. The sum of the borrower’s assets is divided into a monthly “income,” which is used to determine whether they can afford mortgage repayment.
For instance, say you have $1 million in savings. The lender will divide this amount by 360 (the loan term in most fixed-rate mortgages) to arrive at an income of about $2,700 per month. This number is used as your monthly cash flow for mortgage qualifying.
You need a significant amount in savings to qualify.
Only certain types of funds can be counted toward your qualifying income for an asset depletion loan. These typically include:
- Checking and savings accounts
- Money market accounts
- Certificates of deposit
- Investments such as stocks, bonds, and mutual funds
- 401(k) and IRA retirement accounts
- Annuities
It doesn’t matter if the income has a defined expiration date. Lenders will require you to document the regular and continued receipt of 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
- Proof of current receipt via bank statement deposits
For retirees who aren’t earning income, an asset depletion loan may be a good way to qualify for a new home loan or refinance.
2. Fannie Mae senior home buying program
Fannie Mae has policies that allow eligible retirement assets to be used to qualify under certain conditions. It 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 income, they’ll need to demonstrate that the income received will continue for at least three years. Additionally, they’ll need to provide documentation showing the money being drawn from the account.
If the borrower is not already using the asset, the lender can compute the income stream that asset could offer.
3. Freddie Mac senior home buying program
Similarly, Freddie Mac changed its lending guidelines to make it easier for borrowers to qualify for a mortgage with limited income, 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. They must also be “entirely accessible to the borrower, not subject to a withdrawal penalty, and not be currently used as a source of income.”
4. Buy a home with investment money
Investment funds can be used to qualify for a mortgage. But lenders likely won’t count the full asset amount.
When retirement accounts consist of stocks, bonds, or mutual funds, lenders can only use 70% of the value of those accounts to determine how many distributions remain.
5. Buy a home with a co-signer
One of the quickest and easiest solutions for seniors who are having trouble with income qualifying is to add a co-signer.
Some retired parents are doing this by adding their children or a family member 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 or family members, to be counted.
To qualify for HomeReady, you must meet the income limit requirements and purchase a primary residence. Vacation homes and investment properties are not allowed.
6. Buy a home with non-taxable income
Another helpful solution for seniors is counting non-taxable income.
Social Security income, for example, is typically not taxed. Most lenders can increase the amount of this income by 25%. This is known as “grossing up” (before taxes and deductions) when calculating monthly income.
Although lenders are not required to gross up non-taxable income, most will unless it’s not necessary. Further, the lender may choose to gross up by a smaller percentage, such as 10% or 15%.
Speak to your lender about how it calculates non-taxable income.
7. Reverse mortgage loans
One increasingly popular mortgage product specifically designed for seniors is the reverse mortgage loan.
The reverse mortgage is officially called the Home Equity Conversion Mortgage or HECM, and is backed by the Federal Housing Administration (FHA). 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.
Reverse mortgages aren’t for everyone. A home equity line of credit (HELOC), home equity loan, or cash-out refinance are often better choices to tap your home value.
Learn more about who should and shouldn’t consider a reverse mortgage here. Or check out the Department of Housing and Urban Development resource page on HECM reverse mortgages.
8. Property tax breaks for seniors
One final thing to consider as a senior homeowner is that you may qualify for a property tax break. Rules to claim your senior property tax exemption vary by state. So does the amount your taxes could be reduced. Check with your local tax authority or financial planner for more information.
Qualifying for reduced real estate taxes could help lower your debt-to-income ratio (DTI). Having a lower DTI may increase the amount you can borrow on your new home loan.
“Keep in mind, even if you do qualify for tax breaks, taxes will be calculated at the current tax rate in the local area,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
Senior home buying example: Qualifying for an asset depletion loan
As an example, suppose retiree Michael has $1 million in his 401(k). He has not made any withdrawals.
- Michael is not yet 70½. This is 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% 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 cash 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 $630,000 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.” 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). And then combine it with the income from Social Security benefits and his Roth IRA to borrow as much as possible.
He does not actually dip into his 401(k) to pay the mortgage. But this calculation proves that he could rely on his 401(k) to pay the mortgage if need be.
Challenges retirees and seniors face when getting a mortgage
While there is no maximum age limit to apply for a mortgage, seniors and retirees may find it tougher to qualify for a home loan.
Here are a few challenges you might face when buying or refinancing, and what to do about them.
1. No regular income
Mortgage companies need to verify that you can repay a home loan. 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.
For those in retirement, lenders will often consider 401(k)s, IRAs, and other retirement account distributions for mortgage qualifying. They’ll also consider Social Security income, pension, and income from investments.
However, borrowers need to prove these funds are fully accessible to them. You can’t qualify based on retirement accounts or pension unless you can draw from them without penalties.
Retirees also need to show their retirement accounts can be used to fund a mortgage, on top of regular living costs like food and utilities.
2. Income ending in under 3 years (retirement)
Home buyers who aren’t yet retired, but plan to retire soon, may hit a different snag in the mortgage application process. When you buy a home or refinance, mortgage lenders need to verify your income source will continue for at least three years after the loan closes.
Someone retiring in a year or two would not meet this continuing income requirement. In that case, they would not qualify for a mortgage or refinance loan. It won’t matter how high their credit score is. Nor will it matter how much credit card debt they’ve paid off. Or how much money they have stashed away in investments and retirement accounts.
The simplest solution to this problem? Don’t tell your lender you plan to retire.
- There’s nothing on your pay stubs to cue a lender off about retirement plans, so they have every reason to believe your income will continue
- There’s also no guarantee that you will retire when planned. Many people change their plans based on the current economy, their investments, or their desire to keep working
However, you’ll need to be absolutely certain you can afford mortgage payments with the income you’ll have in retirement.
If you’re in a situation where you’ve received a retirement buyout or your employer tells your lender about retirement plans, you may not be able to qualify for a new mortgage. If this is your situation, you may have to wait until you’ve retired and begun drawing from your retirement accounts in order to qualify based on your assets rather than your income.
3. Accessing retirement funds
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. For this reason, the retiree must prove unrestricted access to these accounts, and without penalty.
If the accounts consist of stocks, bonds, or mutual funds, those assets are considered volatile. For this reason, lenders only use 70% of the value in retirement accounts to determine how many distributions remain.
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, depending on how long the loan will be around. 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% 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.
Finding the best mortgages for seniors on social security
Most mortgage lenders have loan programs that make it possible for seniors to buy a home or refinance their current 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. In addition to getting the lowest mortgage rates, 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.
