As you approach retirement age, you may start to consider different ways to make the most of your resources to finance your golden years. Maybe you’d like to avoid relying on only your savings or pension. This phase of life requires careful planning and preparation. And one of the biggest financial concerns for retirees is having enough money to support their lifestyle, especially when it comes to housing. Many seniors own their homes but have limited income, or have substantial savings but no proof of employment, making it challenging to qualify for some mortgage loans. This is where retirement mortgages come in!
What are retirement mortgages?
Put simply, retirement mortgages are loans that allow you to purchase a new home, refinance an existing loan, or even tap into the equity in your home during your retirement years. The good news is, most standard loan options allow those receiving Social Security or other retirement income to qualify without showing proof of employment. There are different types of retirement mortgages available, and not everyone meets their qualifications. While Longbridge specializes in reverse mortgages, let’s briefly explore the different types of retirement mortgages and how you can qualify for one.
What are the different types of retirement mortgages?
There are several types of retirement mortgages available for those in or approaching retirement. These mortgages include conventional, FHA, VA, USDA, reverse, asset depletion, and bank statement loans. Of course, deciding which option is right for you depends on your individual financial situation. It’s important to work with a financial advisor or other trusted financial professional to determine which type of mortgage is best for your specific goals and circumstances. By doing so, you can ensure that you have greater financial security and flexibility in retirement. Let’s look at some of the different options!
Reverse Mortgage: A reverse mortgage is the only loan type designed specifically for older adults. Because of this, they are also the only type of loan that has age restrictions, the most common minimum age requirement being 62 years old. However, some reverse mortgages, like Longbridge Platinum, offer a minimum age requirement in some states as low as 55 years old.1
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM) loan program which has been insured by the Federal Housing Administration (FHA) since 1988. According to the Federal Trade Commission (FTC), reverse mortgages work by allowing you to convert a portion of your home’s equity into income tax-free2 cash without having to sell the home or make regular monthly mortgage payments. Like any mortgage, you must continue to pay their property taxes and insurance and maintain your home. And, unlike a traditional mortgage where you must begin repaying the loan right away, with a reverse mortgage you do not have to repay funds until after you, or the final borrower or non-borrowing spouse, no longer lives in the home.
A lesser known fact about reverse mortgage loans is that they can be used to purchase a new home – this is called a reverse for purchase. It’s a great option if you are looking to relocate closer to loved ones or warmer weather, or to simply right-size to a different home that better suits your retirement, all without needing to make monthly mortgage payments on your new residence (though keep in mind that you’re still responsible for keeping current with property taxes, insurance, and maintenance). It works by allowing you to use proceeds from the sale of your current home, or cash on hand, to make a down payment and cover closing costs. The balance of the purchase is covered by your reverse mortgage proceeds and any remaining funds can be used as you choose. There’s just a single closing, as the home purchase and reverse mortgage are executed in one transaction.
A reverse mortgage may be the right choice if you have a significant amount of equity in your home and want to supplement your retirement income. You can use the funds to pay for healthcare expenses, home renovations, large bills, or however you wish. While there are a number of factors assessed when determining eligibility, in general a reverse mortgage is a good option to explore if you are 62 or older (or in some cases 551 or older), your home is your primary residence, and you have significant equity in your home.
If a reverse mortgage seems like a possible option for you and your retirement, it is essential to understand the pros and cons so you can determine if a reverse mortgage is right for your situation. Our team at Longbridge Financial is committed to helping older adults like you unlock the power of their homes through a reverse mortgage. Contact our team to learn more about your reverse mortgage options!
VA Mortgage: A VA mortgage is a type of government-backed mortgage, that is guaranteed by the Department of Veterans Affairs (VA). These loans are designed to help active-duty service members, certain veterans, and their eligible spouses purchase homes. VA mortgages typically require no down payment and have more lenient credit score requirements than conventional mortgages which makes it an ideal option for senior veterans with limited savings or bruised credit.
These loans can be a viable option for applicable individuals if you want to purchase a new home or refinance your existing mortgage. However, it’s important to note that VA mortgages require a funding fee, which can add to the cost of the loan.3
FHA Mortgage: An FHA mortgage is a type of government-backed mortgage that is insured by the Federal Housing Administration (FHA). These loans are designed to make homeownership more accessible for low- and moderate-income borrowers. FHA mortgages typically require a lower down payment than conventional mortgages and have more lenient credit score requirements.
If you are looking to purchase a new home, you may be eligible for an FHA mortgage. However, it’s important to note that these loans require mortgage insurance premiums, which can add to the cost of the loan.4 Additionally, if you have a high debt-to-income ratio you may have difficulty qualifying for an FHA mortgage.5
USDA Mortgage: A USDA mortgage is a type of government-backed mortgage that is guaranteed by the U.S. Department of Agriculture. Because these loans require no down payment and generally have lower rates than conventional loans, they are a great option for lower-income retirees in rural or suburban areas. While they can be a great option for certain borrowers, USDA mortgages are limited to specific areas and can have caps on both income and property value.4
Conventional Mortgage: A conventional mortgage is the most common type of home loan. These are traditional mortgages that are not insured or guaranteed by the federal government. Conventional loans can be fixed-rate or adjustable-rate, and the interest rate is typically based on the borrower’s credit score, income, and other factors. The down payment for a conventional loan can be as low as 3%, which is helpful for those who may not have a substantial amount of savings. If you have a steady income stream and good credit, you may be eligible for a conventional mortgage.
However, it’s important to note that conventional mortgages can be difficult for some retirees to qualify for. Lenders may require borrowers to have a debt-to-income ratio of 36% or less, which can be challenging if you have limited income.4
Asset Depletion Loans: An asset depletion loan, also known as an asset-based mortgage, is a type of loan that allows borrowers to use their assets as income to qualify. This can be a good option if you have significant assets, such as retirement accounts or investment portfolios, but no regular income stream. The lender will use a formula to calculate your monthly income based on the value of your assets. These loans can have higher interest rates and fees than traditional mortgages. Additionally, you will need to have a significant amount of assets to qualify for the loan.6
Bank Statement Loans: A bank statement loan,also known as a stated income loan, is a type of mortgage that allows borrowers to use their bank statements to prove their income. This can be a good option if you are self-employed and do not have a regular paycheck but have consistent deposits in their bank account. Instead of using tax returns or W-2s to prove income, the lender will look at your bank statements to determine your ability to repay the loan – this a perfect for retirees who did not work in the previous two years and therefore do not have any W-2s to provide.
Bank statement loans can be a good option if you have irregular income, however, these loans can have higher interest rates and fees than traditional mortgages. Additionally, you’ll need to have a good credit score and a significant amount of savings to qualify for the loan.7
How can you qualify for a retirement mortgage?
There are many factors at play when it comes to qualifying for any mortgage, including debt, credit score, and income. If you’re interested in qualifying for a mortgage loan, starting early and preparing for the process is key. Here are a few important steps to get you started:8
- Evaluate Your Credit Score: Take time to evaluate and understand your current credit score. Generally, a credit score of 620 or higher is a good place to start. If yours needs a boost, having this knowledge in advance can help give you time to make improvements.
- Assess Your Income: Lenders often require income documentation for the previous two years. If you are just entering retirement, it may be as simple as providing your W2, however, for most retirees it won’t be so straightforward. Thankfully, there are multiple types of income that lenders deem acceptable when you apply for a mortgage in retirement including Social Security, spousal or survivor’s benefits, VA benefits, pensions, retirement accounts like 401(k)s and IRAs, alimony, disability, cash reserves, dividend and interest payments, and annuities.9 Having the appropriate documents on had to show proof of income before getting started can help set you up for success.
- Understand Your DTI: Your DTI is your debt-to-income ratio. This percentage is determined using an equation that compares the sum of all your monthly payments to your total monthly income. To find your DTI, simply divide your monthly debts by your monthly income and the result should be a percentage. Lenders take your DTI into account, most preferring a DTI of 36% or less, so it is important to know yours and allot yourself the time to make any necessary improvements.
- Know Your PITI: Lenders assess your mortgage principal, interest, taxes, and insurance (PITI) and want to ensure yours is less than 28% of your total income. This amount often also includes the cost of your home maintenance, utilities, and any association fees. Knowing your PITI is an important step in preparing for the loan application process.
- Choose Your Property Type: Before applying for a mortgage of any kind, an important factor is the type of property on which you intend to obtain a loan. Will it be your primary or secondary residence? Is it a single-family home or a condominium? These details are all taken into account when assessing the type of loan you’ll need to qualify for – so, to ensure a smoother process, know your desired property type in advance.
We’ve covered a ton of information about retirement mortgages and how to qualify. And, while it is a lot of information to consider, despite the challenges presented, it’s clear that older adults can qualify for many different types of mortgages in retirement with the right understanding and adequate preparation. If you are considering a retirement mortgage, it is important to shop around and seek professional advice to ensure that a mortgage, and which type of mortgage, is right for you.
To learn more about the retirement mortgage created specifically for older adults, the reverse mortgage, contact our team to learn how the equity in your home can help you live the life you imagine. We’re committed to providing you with superior customer service – in fact, we feel so strongly about going above and beyond for our customers, that we’ve put our list of commitments in writing: The Longbridge Commitment.
