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What to Know About Qualifying for Retirement Mortgages
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If you want to buy a house after retirement, there are several retirement mortgages to choose from. In fact, most standard loan programs allow seniors receiving Social Security and retirement income to qualify without proof of employment.
What are retirement mortgages?
Retirement mortgages are home loans for retired borrowers. They don’t require proof of a job or standard income documents like pay stubs and W-2s. However, you must prove you’ve reached the legal age to receive Social Security or retirement income.
The only type of mortgage with an age requirement is the reverse mortgage program. To get a reverse mortgage, also called a home equity conversion mortgage (HECM), you’ll need to be at least 62 years of age. However, lenders are prohibited from age discrimination based on the Equal Credit Opportunity Act, and there is no maximum age requirement.
That means a 90-year-old borrower can take out a 30-year mortgage if they prove they meet the minimum mortgage requirements for the loan they’re applying for.
What types of retirement mortgages are offered?
Although lenders may not specifically call them retirement mortgages, mortgage companies follow special guidelines related to retirement income set by Fannie Mae, Freddie Mac and government-backed FHA, VA and USDA loan programs. 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.
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 mortgage insurance premiums (mortgage insurance protects lenders against losses if you can’t make your payments and the lender forecloses).
Loans backed by the Federal Housing Administration (FHA) allow retired borrowers to qualify with credit scores as low as 500 and 10% down payments. 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.
A VA loan makes it easier for eligible retired military borrowers to buy or refinance a home with no down payment or equity and flexible DTI (debt-to-income) ratio guidelines. Although the guidelines for loans backed by the U.S. Department of Veterans Affairs (VA) don’t set a minimum credit score, VA-approved lenders often require at least a 620 minimum. VA loans also don’t require mortgage insurance, but you may pay a funding fee unless you’re exempt due to a service-related disability.
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 is 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.
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, they may offer you a 15-year mortgage and use your asset balance to give you $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 cannot 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.
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 monthly property taxes and insurance payments on your home. We’ll discuss reverse mortgages in more depth later.
How to qualify for retirement mortgages
Applying for a mortgage during retirement is the same as applying for a mortgage while employed. You need to meet the same basic credit and down payment 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:
|Type of income||Documents needed||Specific guidelines|
|Social Security||Social Security award letter |
Proof of recent receipt of income
|Social Security survivor benefits also require proof you’ll receive the income for at least three more years|
|Supplemental Social Security Income (SSI)||Social Security award letter |
Proof of recent receipt of income
|Retirement, pension or government income||A statement from the company providing income |
A copy of the retirement award letter or benefit statement
A bank statement showing the income deposited into the account
Signed federal tax returns
IRS W-2 or 1099 form
|401(k), IRA or Keogh retirement income||Same conditions as above |
Must also confirm the income will continue at least three years
|Must have unrestricted penalty-free access to all accounts|
|Dividend and interest income||Two years of tax returns showing receipt of income |
Copies of account statements verifying balance
|VA benefits income||Letter from VA confirming income |
Verification the income will last at least three years
|Not required for VA retirement income or long-term disability income|
|Long-term disability income||Proof of eligibility for income |
How much and how often the benefits are paid
Confirmation there is no end date to receipt of the income
How non-taxable income helps you qualify for 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 qualify you. However, retirement or Social Security Income is often non-taxable, which allows lenders to “gross it up,” giving you more qualifying power.
For example, if you receive $2,000 per month of non-taxable income, a conventional lender can add an amount equal to 25% to the non-taxable income, which gives you an extra $500 to qualify. Here’s how it works:
- $2,000 non-taxable income
- $500 gross-up ($2,000 x .25% = $500)
- $2,500 of grossed-up qualifying income ($2,000 + $500 gross up = $2,500)
You’ll need to provide award letters, tax returns or other documents to verify the tax-free status of your income.
Using a reverse mortgage in retirement
A reverse mortgage is a special program that allows seniors to use their home’s equity to create an income source, a line of credit or a combination of several options. With a reverse mortgage, you can:
- Take a lump-sum payment to boost your cash reserves and secure a fixed rate
- Choose regular monthly payments for the life of your loan
- Pick a set number of months you want to receive monthly payments
- Select a line of credit and use the funds as you need them
- Combine a line of credit with a monthly payment for as long as you own the home
- Add a line of credit to a monthly payment you receive for a set time period