How to Qualify for a Retirement Mortgage
Retirement doesn’t have to stop you from buying a new home. In fact, many standard loan programs allow seniors receiving Social Security and retirement income to qualify for retirement mortgages without proof of employment.
- Many standard mortgage programs can also be used to provide mortgage loans for seniors.
- Being able to document your income is the most important step in qualifying for a retirement mortgage.
- A reverse mortgage is a special type of loan program available to borrowers aged 62 or older. It lets you receive income payments by borrowing against the equity you’ve built up in your home.
What are retirement mortgages?
Retirement mortgages are mortgage loans for seniors that don’t require standard income documents like pay stubs and W-2s.
However, mortgage companies do follow special guidelines set by Fannie Mae, Freddie Mac and government-backed loan programs related to documenting your retirement income. There are also unique programs that allow you to convert assets to income if you don’t receive retirement pay from traditional sources like pensions or Social Security.
What types of retirement mortgages are offered?
Lenders may not specifically call their products retirement mortgages — in fact, many loans available to employed borrowers are also available to retirees. There are some mortgages, however, that cater to the financial circumstances of seniors and retired borrowers.
Conventional loans
Government-sponsored enterprises Fannie Mae and Freddie Mac fuel the housing market with 3% down payment mortgages for retired borrowers. Seniors who can make a 20% down payment won’t pay private mortgage insurance (PMI) premiums.
FHA loans
Loans backed by the Federal Housing Administration (FHA) allow retired borrowers to qualify with a credit score as low as 500 and a 10% down payment. With a 580 credit score, the down payment is only 3.5%. Unlike conventional mortgage insurance, FHA mortgage insurance is required, regardless of your down payment.
VA loans
A loan backed by the U.S. Department of Veterans Affairs (VA) makes it easier for eligible retired military borrowers to buy or refinance a home with no down payment or equity and flexible debt-to-income (DTI) ratio guidelines.
Although the guidelines for VA loans don’t set a minimum credit score, VA-approved lenders often require at least a minimum credit score of 620. VA loans also don’t require mortgage insurance, but you may pay a VA funding fee unless you’re exempt due to a service-related disability.
USDA loans
If you’re looking to retire in a rural area, a loan guaranteed by the U.S. Department of Agriculture (USDA) doesn’t require a down payment. It’s designed for low- to moderate-income borrowers. The home must be in a USDA-designated area, and borrowers pay an upfront and annual guarantee fee instead of mortgage insurance.
Reverse mortgages
If you’re at least 62 years old and have at least 50% equity in your home, you may convert that equity to income in various ways with a reverse mortgage. The biggest benefits: You don’t need income to qualify, there is no monthly mortgage payment and you’re only responsible for property taxes and monthly insurance payments on your home.
There is only one reverse mortgage program backed by the federal government — the home equity conversion mortgage (HECM) — but private lenders and state governments also offer reverse mortgages.
Asset depletion loans
Retired borrowers with a high net worth may opt for retirement mortgages that let them convert their assets to income.
For example, if you have a $1 million investment account with your bank, it may offer you a 15-year mortgage and use your asset balance to calculate $5,555.56 per month of qualifying income ($1,000,000 divided by 180 months = $5,555.56).
Bank statement loans
Some lenders offer bank-statement programs if you can’t document income on your tax returns but receive regular large deposits from royalties or a business buyout deal. Qualifying income is based on your deposits for the last 12 to 24 months.
Here are 10 types of mortgage loans that you can consider when buying a home.
How to qualify for retirement mortgages
Applying for a mortgage during retirement is the same as applying for a mortgage while employed. Your age won’t be a factor unless you apply for a reverse mortgage.
Lenders are prohibited from age discrimination based on the Equal Credit Opportunity Act. But you will need to prove you meet your loan program’s minimum mortgage requirements and document your income based on the type of retirement income(s) you receive.
Below is a breakdown of the documents you’ll need based on the acceptable types of retirement income:
Using non-taxable income can help you qualify for bigger retirement mortgages. When you apply for a home loan with regular hourly or salary income, lenders use your gross income (before taxes and deductions) to determine whether you qualify. However, retirement or Social Security income is often non-taxable. Therefore, lenders can “gross up” your income by an additional 15%.
For example, if you receive $2,000 per month of non-taxable income, a conventional lender can account for an additional $300. In other words, your $2,000 a month will instantly become $2,300, boosting your qualifying power.
You’ll need to provide award letters, tax returns or other documents to verify the tax-free status of your income.
Frequently asked questions
Yes, as long as you meet certain documentation requirements, have unrestricted access to the retirement accounts and can confirm that the payments will continue for at least three years.
Yes. As long as you can verify recent receipt of it, along with an award letter confirming your current award amount. If you’re receiving survivor benefits, you must also prove you’ll get the income for the next three years.
Commonly known as a “reverse mortgage,” the home equity conversion mortgage (HECM) program and similar private or state offerings allow seniors age 62 or older to turn the equity they have built up in their homes into funds that can help them stay afloat during retirement.
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