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Senior Mortgages: Home Loans And Refinancing After Retirement

Victoria Araj10-minute read

June 05, 2021

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Taking out a new mortgage or refinancing after retirement can be a challenge, but with the right resources, you don't have to limit your housing options. 

In this article, we’ll look at the best loan options for seniors and how you can improve your chances of qualifying on a fixed income.

What Makes Buying A Home Different For Seniors?

There's no age limit when it comes to getting or refinancing a mortgage. Thanks to the Equal Credit Opportunity Act, seniors have every right to fair and equal treatment from lenders. So what makes getting a mortgage different as a senior? It all comes down to motivations and finances.

Your Reasons For Moving

If you've lived in your current home for many years or have your mortgage paid off, you might wonder why you'd even want to move. Does it make sense to go through the entire home buying process again? 

For many seniors, the answer is yes. If that’s you, your reasons may vary:

  • You're planning on needing a safer or more accessible home soon
  • Your family home feels too large now that your children have moved out
  • You don't want to take care of upkeep or cleaning anymore
  • Your current state or city is too expensive
  • Your mortgage payments could be lower
  • You could be closer to your family if you moved

Regardless of your motivations, it isn't uncommon for seniors to take on new home loans, and you'll be in good company if you decide now is the right time to buy a house.

Your Income And Assets

Most lenders like to see evidence of steady, reliable income – and if you're no longer working, it might be difficult for you to demonstrate regular cash flow when you apply for a loan or refinance. 

Luckily, many lenders now allow seniors to use imputed income from their retirement assets to qualify for loans. This includes:

  • 401(k)s
  • IRAs
  • Social Security
  • Pensions
  • Investment accounts

An important caveat: If you have accounts made up of bonds, stocks or mutual funds, lenders can only consider 70% of the value of those assets due to their volatility. 

To make your assets help your application, you'll need to demonstrate that you can draw on these accounts without penalties for at least the next 3 years to support both normal living expenses and loan payments. You'll also need to provide extra documentation on top of the standard mortgage paperwork to show you have access to these accounts. 

Not retired yet, but planning on it soon? Since lenders want to see evidence that you have finances to cover at least the next 3 years (either from your job or retirement accounts) you might get denied if you express plans to retire sooner than that. You should be all set to reapply once you're fully retired and can access your assets. 

With that said, you aren’t required to report your planned retirement date. If you do plan on retiring soon, just make sure your finances can cover your loan payments once your regular income stops.

Your Thoughts About The Loan Term

Can a 70-year-old get a 30-year mortgage? Absolutely. The Equal Credit Opportunity Act's protections extend to your mortgage term. Lenders can't deny you a specific loan term on the basis of age. 

The loan term you're comfortable with has much more to do with your finances than your age. Many seniors use a 30-year mortgage because of its relatively low monthly payments, but you might decide to use a 15-year or shorter term depending on your intentions for the house.

In most cases, you don't need to worry about what will happen to your mortgage if you pass before it's paid off. Your loved ones can usually sell the house to repay the remainder of your loan, but if you want your family to keep the home, you may want to set up a life estate and set money aside or plan on using insurance to cover the mortgage.

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How To Apply For A Refinance On A Fixed Income

Just like taking out a new loan, refinancing can be a slightly different experience when you're living on a fixed income.

Decide What You Want From Your Refinance

What happens when you refinance your mortgage loan? You replace your current loan with one that’s more manageable. You can refinance to get a lower interest rate, reduce your monthly payment or take cash out to cover debt. A refinance can mean the difference between staying in your home and foreclosure.

Apply With Your Lender Of Choice

The refinance process begins with an application. You don’t need to refinance with your current lender – you can submit an application through your lender of choice. Your lender will usually ask you for documentation that proves your income. This can include statements detailing your Social Security benefits, tax returns and any statements from your retirement accounts.

Get Through The Underwriting Process

During underwriting, your lender will verify your income and make sure you meet the standards for a refinance. Your lender will also schedule an appraisal to ensure your home hasn’t decreased in value. After all your paperwork clears and your appraisal comes back, you’ll sign on your new loan at closing.

Understand The Hurdles

Living on a fixed income can make it more difficult to qualify for a refinance. Lenders need to know that you have enough money to cover your monthly payments. They also need to know that if you run into financial hardship, you have enough in savings to continue making your payments. Luckily, there are a few steps that you can take to improve your chances of qualifying for a refinance.

Increase Your Chances Of Getting Approved

Make sure you maximize your chances of approval before you apply for your refinance or new loan. For both processes, you'll want to make sure you include all eligible income on your application. If you're refinancing, you can take a few more steps to give yourself a better chance of getting approved.

Start With Your Current Lender

You may have an increased chance of getting a refinance with your current lender since they will already know the details of your loan. Your lender may be able to suggest a refinance solution you qualify for, and may even be able to loosen the requirements to refinance in some circumstances if you’re current on your mortgage payments. 

Include All Your Income

Your lender will ask you questions about your income and assets when you apply for a new mortgage or to refinance your loan. However, lenders don’t only consider income from employment when they review your application. Maximize your chances of getting approved by including all streams of income with your application. Some income your lender might consider includes:

  • Social Security payments
  • Structured settlement payments
  • Dividends from stocks and other investments
  • Alimony payments
  • Military pension payments and benefits
  • Income from rental properties you own
  • Payments from your IRA, 401(k) or other retirement accounts
  • Royalty income from patents 

The specific streams of income you can include in your application can vary from lender to lender. The most important factor is that the income you have is set to continue consistently. Your lender may exclude certain streams of income that aren’t long-standing. For example, your lender probably won’t consider alimony as income if it is set to end in 12 months.

Maximize Your Appraisal Value

The appraisal is an important part of the refinancing process. During an appraisal, an appraiser will tour your property and give you an estimate of how much your home is worth. Lenders require appraisals because the appraisal assures your lender that they’re not loaning out more money than your home is worth. Maximizing your appraisal value can increase your chances of qualifying for a refinance. This is especially true if you want to take cash out of your equity.

Use these simple tips to increase your home's value before your appraisal:

  • Increase your curb appeal: Your curb appeal has an impact on the value of your home. Take a tour of the exterior of your property and see where you can make improvements. Paint fencing, plant flowers and power-wash walkways and hardscaping to maximize your home’s curb appeal.
  • Declutter: Your appraiser won’t deduct points if you haven’t done the dishes or if you have a few books lying around. However, decluttering your home can make your rooms look larger and make your home feel more comfortable. Take a walk through each room a few days before your appraisal and make sure that everything is clean.
  • Create a list of upgrades: Permanent upgrades you’ve made to your home increase your appraisal value. Create a list of them and give it to your appraiser. Some examples of permanent upgrades include installing a home security system, replacing old appliances and adding a pool. Don’t include removable or aesthetic upgrades like painting a bedroom, putting up wallpaper or hanging mirrors.

Mortgage Options For Seniors

Now that you know how to increase your chances of a successful loan application, it's time to decide what kind of loan works best for you. There are a variety of options, including:

  • Rate and term refinance
  • Cash-out refinance
  • Reverse mortgage
  • Home equity loan
  • HELOC
  • HECM

Let’s take a look at what you can use to manage your mortgage or find a new one.  

Rate And Term Refinances

Are you having trouble making your monthly payments? You may want to consider a rate and term refinance

How it works: When you take this option, you change your interest rate, the amount of time you have to pay back your loan, or both. Your monthly payment will go down if you take on a lower interest rate or a longer mortgage term.

Example: Let’s say you have a mortgage loan with $50,000 in principal remaining, a 4% interest rate and 10 years that remain on your term. Your monthly payment in this example would be $506.23 before taxes and insurance. What happens if you refinance your loan to a 15-year term and keep the same interest rate? Your monthly payment would be $369.84. Plus, you can save even more if interest rates are lower now than when you bought your home.

What to keep in mind: Refinancing to a longer term means you’ll pay more in interest. It can also mean that it’ll take longer to fully own your home. Leaving an outstanding mortgage balance when you pass away can also interrupt any plans you have in place to leave your home to an heir.

Cash-Out Refinance

You probably have sizeable equity in your property if you’ve been living in your home for a while. Equity is the percentage of your loan’s principal you’ve paid off. It’s also the percentage of your home that you own outright. You can access your home’s equity with a cash-out refinance.

How it works: You accept a loan with a higher principal balance when you take a cash-out refinance. In exchange, your lender gives you the difference in cash. This can be useful if you have a large amount of debt you want to pay down quickly.

Example: Let’s say you incur $20,000 worth of credit card debt. Let’s also say you have a home loan with $50,000 remaining on your principal and $100,000 worth of paid equity. Your lender gives you a loan worth $70,000 and pays you $20,000 in cash after closing. You then make payments on your new loan in monthly installments – just like your previous loan.

What to keep in mind: Cash-out refinances can be useful if you’re a senior because you’re likely to have more equity in your home. Remember, though, that you’ll pay for the money you take out in interest over time. Never use a cash-out refinance for everyday living expenses, as this can quickly lead to a cycle of more debt than you can handle.

Reverse Mortgage

A reverse mortgage is a special type of mortgage for seniors aged 62 and older that can help cover ongoing living expenses. To qualify for a reverse mortgage, the home must be your primary residence.

How it works: A reverse mortgage begins when you convert part of your equity to pay off your existing loan. Once you finalize your reverse mortgage:

  • You no longer have to pay on your original loan. 
  • You still own your home and you remain on the home’s title. 
  • You receive any remaining proceeds from your new loan. 
  • You can get your money in monthly installments, a single lump sum or a combination of both.

What to keep in mind: 

  • A reverse mortgage decreases the equity in your home and increases the amount of debt you have. 
  • The loan is due when you pass away, sell your home or otherwise move out. 
  • Reverse mortgage lenders charge interest on what you borrow.

Keep in mind that you still have upkeep obligations even after you remove your monthly mortgage payment. You must continue to do home maintenance, pay your property taxes and cover your insurance expenses. Your reverse mortgage lender can cancel your agreement and potentially foreclose on your property if you fail any one of these requirements. You should also be advised that reverse mortgage scams are common. Familiarize yourself with red flags before pursuing this option.

Rocket Mortgage® does not offer reverse mortgages at this time. 

Home Equity Loan

A home equity loan allows you to access your home’s equity with a lump sum. 

How it works: A home equity loan is not a refinance. Instead, you take out a second mortgage against the equity you have in your home. You make payments to your lender each month after you receive your money. These payments are in addition to the monthly payments on your original loan.

What to keep in mind: Home equity loans can be useful if you need to cover a large expense and interest rates are higher now than when you took your loan. However, make sure that you can handle both monthly payments before you get your loan. Rocket Mortgage® does not offer home equity loans.

Home Equity Line Of Credit

A HELOC is similar to a home equity loan, but instead of getting your money in a lump sum, you gain access to a revolving line of credit against your equity. 

How it works: All HELOCs begin with a draw period, and you can use your line of credit and spend against your home equity. You also only need to pay for any accumulated interest during the draw period. 

Example: If you have $50,000 worth of equity in your home, a HELOC might give you a credit line with a limit of up to $45,000.

What to keep in mind: Once the draw period ends, you pay back the balance on your HELOC in fixed monthly payments. These come in addition to any mortgage payments you make each month. Make sure that you can make your payments before you take a HELOC. Rocket Mortgage® does not offer HELOCs at this time.

The Bottom Line: It's All About Your Finances

Managing loans on a fixed income as a senior citizen can be challenging – but it isn’t impossible. Make sure you include all of your income when you apply. You can also improve your chances of a refinance by sticking with your current lender and maximizing your appraisal value. 

Ready to get started? You can start your refinance or mortgage application online now.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.