You are never too old to apply for a mortgage. A senior mortgage may help you get the cash you need.
It’s illegal for lenders to discriminate against you based on your age. In other words, you’re never too old to get a mortgage. While it may not be wise in some cases, there are thousands of people that get a senior mortgage. It all comes down to proving that you can afford the loan, whether you are 25 or 97-years old.
Proving Your Income
What lenders want to know is whether or not you can afford to pay the mortgage back. That’s what it comes down to regardless of your age. Seniors are typically on a fixed income, which is often the risk. 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
- 401K income
- Pension income
- IRA income
Any income that you can prove, you can typically use for qualifying. 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 the award, plus proof that you actually receive the income. Lenders use this income to determine your debt-to-income ratio or the comparison of your income to your monthly debts.
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 you have outstanding personal loans, it will eat up your monthly income and reduce how much you can borrow for a mortgage.
Going Beyond Fixed Income
If your fixed income isn’t enough, you may be able to use your investments in stocks and bonds to qualify for a mortgage. This doesn’t work the same as your retirement income. Instead, lenders use an asset depreciation method. You don’t have to take out a set amount each month, instead, the lender figures out how much you could afford based on the balance.
First, they cut the balance down to about 70%. This accounts for any losses as well as tax liabilities. 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’d 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. It’s like working the system backward, but it helps you get qualified for a senior mortgage, should you need one.
Prove Your Reason for the Senior Mortgage
Lenders need a reason that you need the senior mortgage. For example, do you have a high-interest loan now and you want to lower the rate? You’ll actually save money by taking out a mortgage with a lower rate, which puts you in a better position and lowers the risk of default.
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, make home improvements, or just want an emergency fund handy, 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 for a mortgage – the 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 you 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 on your property, taking the home from you. This doesn’t occur with a reverse mortgage unless you violate the terms of the loan.
In order to qualify for the reverse mortgage, though, 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.
What Should You Choose?
Only you know your financial situation and what will work best for you. Are you comfortable affording the payments of a mortgage while you are on a fixed income? If not, a reverse mortgage will give you access to the funds you need without the payment requirement each month.
Either way, your estate will have to pay off the mortgage, whether a senior mortgage or reverse mortgage. The bank will get their money bank that you borrowed. Compare the rates of interest, costs, and the payments required when deciding what’s right for you.
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. You’ll pay interest whether you take out a regular mortgage or a reverse mortgage. It all comes down to how well you can afford the monthly payments or if you’d rather leave it up to your estate.