Is it true you’re never too old for a mortgage? A recent study from the National Association of REALTORS® found that older generations, specifically Baby Boomers and the Silent Generation, feel strongly that now is a good time to sell their homes as they downsize or have the equity to buy a brand new house.
Since the housing market crash in 2008, more homeowners have stayed put in their houses for a longer period of time- which has resulted in increased equity. In fact, the CoreLogic 2021 1st Quarter Homeowner Equity Insights report stated that U.S. homeowners have seen a 19.6% increase of $1.9 trillion in their home equity since the first quarter of 2020.
As older homeowners prepare for retirement, or may already be retired, they’re ready to sell their family homes and move for a number of reasons: empty nest, the need to downsize, newfound needs and wants due to the COVID-19 pandemic and the opportunity to cash in on built-up equity.
But some retirees are wondering if they could even qualify for a new mortgage at this stage in their lives. The good news is yes, you can qualify for a mortgage if you’re retired or nearing retirement. Let’s review some of the ways you can qualify, what your loan options are and what risks you need to consider.
Lenders can (and should) consider alternate forms of income.
If you’re retired, or soon to be, you may be wondering how you could qualify for a loan without a steady income.
Many mortgage lenders will consider you based on alternate forms of income. In fact, you have federal protections under the Equal Credit Opportunity Act (ECOA). Much like the Fair Housing Act offers protection against discrimination in housing, the ECOA makes it illegal for lenders to refuse a loan based on your age, race, religion, national origin, sex, marital status or if you receive income from a public assistance program. Granted, you may provide this information in an application, but it can’t be used as a reason to deny you a loan.
Lenders also can’t use this information to raise your interest rate or ask for a larger downpayment.
In addition, under the ECOA, lenders must consider these as forms of income:
- Reliable income from part-time employment, Social Security, pensions and annuities
- Reliable alimony or child support payments
- Reliable public assistance income
Lenders must also accept someone other than your spouse as a co-signer on a loan if you need one, such as your child or another family member. What does all of this mean for you? Lenders must evaluate you for a home loan the same way they would anyone else: based on credit score, debt-to-income ratio and income.
What kind of mortgage can I get as an older buyer?
It’s not uncommon for older buyers to take out mortgages. In fact, according to Realtor.com, borrowers over the age of 65 make up about 10 percent of all mortgages that are originated each year.
The question is does it make sense for you to choose the same 30-year mortgage you’ve had before? If you are in the 50-65-year-old range, a 30-year mortgage isn’t that big of a deal. But if you’re older than 65, a 30-year mortgage might not make much sense.
If your budget allows it, you can always opt for an adjustable-rate mortgage and pay a higher interest rate over a shorter period of time. The downside to this would be making sure this fits your budget 10-15 years down the road when your income may be more limited.
Another popular option for older buyers is a home equity conversion mortgage (HECM). A HECM is part of the Federal Housing Administration (FHA)’s reverse mortgage program. Designed for older buyers, the program allows you to withdraw the equity in your current house and use it to purchase a new home, as long as you can pay the closing costs and the difference between the purchase price of the new home and your HECM proceeds.
HECM program requirements are:
- You must be 62 years old or older
- Own your property outright or have a small balance left
- Live in the house
- Can’t be delinquent on any federal debt
- Must attend a consumer information session with an approved HECM counselor
This can be a good option for buyers who own their homes outright and have the equity, if not the cash, to put into purchasing a new home. These can also be a good option for any older buyers who don’t meet conventional loan income requirements.
Sit down with your loan officer to discuss all of your options. They can review your finances, any outstanding debt and the equity in your current home and guide you to the best mortgage for you.
What happens to my mortgage if my income changes, my spouse passes away or I pass away?
Life events happen and your income, marital status or family structure can change. This risk obviously increases as you grow older. What happens to your mortgage if your income suddenly changes, your spouse passes away or you pass away? These are scenarios you’ll have to consider as an older buyer taking on a new home loan.
If your income changes:
If something happens to your income (or you suddenly acquire unexpected debt- such as medical expenses), how will this affect your mortgage and your retirement in the long run? The last thing you want as a retiree is to suddenly be unable to meet your monthly mortgage payments.
It’s not uncommon for this to happen to older generations. About half of the families headed by someone at least 75 years old are in debt, according to a 2018 report from the Employee Benefit Research Institute (EBRI). The report also found that families headed by someone 75 years or older whose debt payments outweigh their incomes are at the highest levels since 1992.
So what can you do to prevent falling behind on your mortgage payments? Financial planning and buying a house well within your means are the best options here. Talk to your loan officer and talk to an independent financial planner. These two experts should be able to help you figure out what home loan would be manageable for you down the road. Just because you can afford the mortgage on a $300,000 house at age 65, doesn’t mean you will be able to afford it at age 75. Plan ahead!
If your spouse passes away:
Many couples are joint borrowers on a home loan. So what happens if your spouse passes away? If your name is on the home loan, you’ll still be responsible for making the payments. However, lenders are prohibited from asking for the entire mortgage just because one borrower has died.
Most of the time, any proceeds from the deceased person’s estate would go toward any outstanding debt. If your spouse had a life insurance policy and you are the beneficiary, you could use the proceeds as payment on the mortgage. In a worst-case scenario, if your spouse’s assets are not enough to cover the debt, you may have to sell the house in order to pay off the mortgage. If your spouse’s income was the primary basis for which the loan was originated, and now you no longer have that income, this may be your only option.
If you pass away:
This is something you will have to plan for, especially if you have a partner who would be financially affected. Your mortgage is not absolved when you die, even if it’s just your name on the loan. You can work with a financial planner, or the executor of your will, to arrange for monthly payments to be made from your estate after you die. This only works if you know you have the assets or enough saved to continue to fund the mortgage for years to come.
The co-signer on your home loan (whether it be your spouse, child or another family member) can refinance the loan after you die if the payments aren’t manageable. If you owe more than the house is worth when you die, your executor can negotiate a short sale of the house with the lender. If the house is worth more than what you owe, your executor can sell the house and divide the proceeds among your heirs or use it to pay off any other debt you might have had.
The best thing you can do for your family is estate planning. Sit down with a financial planner and your attorney and plan out what happens with your life insurance, who can take on the house and how much you should have in your accounts if you’d like family members to keep making payments on the house.
Whether you’re downsizing or planning to buy a vacation home to retire to, there are many options available for older buyers. If you’re looking forward to retirement in a few years or have already retired, the best thing you can do for your finances and family is to get a plan together! Talk to your lender and financial advisor to find out what kind of mortgage works best for you, how much house you can afford when and if your income changes and what happens to your mortgage after big life events.
The long and short of it is, you’re never too old for a mortgage if you want one!
You don’t have to be a first-time buyer to take advantage of downpayment assistance and home improvement programs. These are the 20 best programs, grants and loans for homebuyers in Iowa. Check out our guide to see what you might qualify for!