You are never too old to apply for a mortgage. A senior mortgage may help you purchase a home.
It's illegal for lenders to discriminate against you based on your age. So from a legal and logistical perspective, you're never too old to get a mortgage.
Senior mortgages are not uncommon. Regardless of your age, a lender is primarily focused on one thing: proving that you can afford the loan, whether you are 25 or 97-years old.
Proving Your Income
As long as you have the means to do so, you're never "too old" to get a mortgage. What lenders want to know is whether or not you can afford to pay the mortgage back; it's as simple as that.
Many seniors are on a fixed income, which means you may have to leave more headroom in your budget to account for life's surprises. Is your income high enough to cover the mortgage plus your other bills and the daily cost of living?
Lenders look at all types of income, even non-employment income. Seniors often have:
- Social Security income
- 401(k) income
- Pension income
- IRA income
Any income that you can substantiate with documentation can typically be used for qualifying for your mortgage. The required proof depends on the lender and type of loan. For example, you can prove Social Security income with your award letter and two recent bank statements showing the deposits.
The same is true of any retirement income. You need the letter that proves your income amount, plus proof that you receive the income regularly. Lenders use this income to determine your debt-to-income ratio or compare your income to your monthly debts, as they would with any potential borrower.
The less debt you have, the easier it becomes to get approved. For example, if you have a large amount of credit card debt or outstanding personal loans, it will eat up your monthly income and reduce how much you can borrow for a mortgage.
Going Beyond Fixed Income - Asset-Based Loans
If your fixed income isn't enough, you may be able to use your investments in stocks and bonds to qualify for a mortgage. With an asset-based loan, you are essentially borrowing against these assets. To figure out how much you can borrow when using these types of assets requires some calculations; lenders use a method called asset depreciation. You aren't expected to liquidate these assets to make payments each month; instead, the lender will use the size of these assets to figure out how much you can borrow.
The calculation is essentially an attempt to figure out how much they would be worth if you default on the loan. First, they'll reduce the balance to about 70% to account for any potential losses and tax liabilities that would be incurred. The lender then uses the 70% figure to determine how much mortgage you can afford. They take that figure and divide it by the number of months in the term. If you take out a 30-year term, they will divide it by 360, and for a 15-year term, they divide it by 180 months.
The lender uses the income figure they derived to determine how much of a mortgage payment you can afford each month.
What Is Your Loan's Purpose?
Lenders will want to understand the reasoning behind your need for a senior mortgage. For example, are you refinancing a higher-interest loan? Or are you looking to purchase your first home? In the former case, since you'll save money, you'll be in a better position to be approved.
If you need the loan to tap into some of your home's equity, show the lender why you need it. If it's because you don't have enough money for living expenses, you probably won't get qualified. But, if you need the funds to consolidate debt or make home improvements, you may qualify as long as you can prove that you can afford the loan.
Senior Mortgage vs. Reverse Mortgage
As a senior, you do have another option – a reverse mortgage. Unlike a traditional mortgage, you don't make payments on a reverse mortgage. As long as you own your home free and clear, you may tap into the home's equity, taking the money as a lump sum or receiving monthly payouts.
The reverse mortgage still accumulates interest, and you pay closing fees, just as you would a senior mortgage. The difference is that you don't have to make payments until you move out of the home or die. If you die and still own the home, your estate becomes responsible for paying off the mortgage within a short amount of time. With a reverse mortgage, you'll never owe more than the home's value, should the value decline, and you owe more than the home is worth.
With a senior mortgage, you have to make monthly payments that include both principal and interest. If you don't make your payments, the lender can foreclose your property, taking the home from you. This doesn't occur with a reverse mortgage unless you violate the terms of the loan.
To qualify for a reverse mortgage, you must be at least 62 years old, prove that you can afford the home's taxes, insurance, and upkeep, and own the home without a mortgage currently.
Your Age Matters Less Than Your Ability To Make Payments
You're never too old to apply for a mortgage, but make sure it makes financial sense. Think about the long-term and how it will affect your estate. It all comes down to how well you can afford the monthly payments or if you'd rather leave it up to your estate.