Your Guide to Buying a Home in Retirement
The process of buying a home in retirement is a little different than buying a home with employment income. This guide breaks down what to expect.
The process of buying a home in retirement is a little different than buying a home with employment income. This guide breaks down what to expect.
People can buy a home at any time during retirement. There are no upper age limits on who can buy a home, or how many homes you can own.
Whether you’re looking to downsize or relocate from a home you currently own, or you’ve decided to become a homeowner for the first time, buying a home in retirement offers many advantages. Chief among them is the ability to stabilize your housing payments with a fixed-rate mortgage rather than worrying about rent hikes each year.
A home is also a substantial asset that you can pass on to your children or grandchildren.
In this guide, you’ll learn different options for buying a home in retirement and how to determine which path is best for you.
If you’re retired or getting older and wonder if there are mortgage loans for a retired person, the answer is yes. Age is not the determinant for getting a mortgage; income and ability to repay are the factors lenders will look at.
Retirees may qualify for any standard loan program, including conventional loans and government-backed mortgages, if they meet the borrower requirements.
“As long as the applicant meets income/asset and credit criteria, age doesn't matter,” said Allan Prigal, a Realtor® in Montgomery County, Md. “I had my father-in-law place a 30-year fixed-rate mortgage on his condo 10 years ago, when he was 83 years old.”
Lenders will look at your monthly income, your credit score, debt-to-income ratio (DTI), and other assets — the same factors they would use for any other borrowers.
In fact, the Equal Credit Opportunity Act mandates that lenders not deny older applicants loans based solely on age.
“Mortgage lenders are not allowed to use age as a factor for qualifying for a mortgage,” said Shaheedah Hill, a REALTOR® in Atlanta, Ga. “So, although their mortgage may outlive them just like other investments they may have, the home will be part of their estate and can allow their family to build generational wealth with the equity in the home.”
If you're buying a home in retirement, odds are mortgage technology has changed since your last purchase.
Even though age isn’t a factor in getting a mortgage, seniors may face other hurdles in getting a mortgage when they’re retired. Hill said that some seniors may feel overwhelmed by the application process due to the paperwork required and a lack of familiarity with the technology involved.
“Now that most mortgage applications are online and very rarely are there opportunities to meet face to face, they are often on their own,” Hill said. “It is a challenge trying to navigate the new technology, so finding a patient and knowledgeable Realtor is very important for seniors.”
Hill suggested that older homebuyers work with a real estate agent who specializes in working with their age group. She also recommended bringing younger family members into the process, including attending meetings with their real estate agents and lender. Trusted relatives can “make sure they fully understand the process and the contracts before signing,” and can also help out with any technology challenges, Hill said.
If you’re still working, whether full-time or part-time, your lender can use that income to qualify you for a mortgage (assuming you’ll continue working for some time after you close on the home).
However, there are other types of income you can use:
|An important note about any funds (retirement or investment) held in stocks. Because stock prices fluctuate, most lenders value your accounts at a percentage of stated value, to account for potential decreases. In other words, if you have $500,000 in a 401k invested in stocks, and your lender values it at 70%, the value will be $350,000.|
When buying a home in retirement, your lender will look at how much monthly income you have and the stability of it. They want to see that your income level will remain the same for the foreseeable future to ensure that you can afford your monthly mortgage payments.
Keep in mind that each income type can come with its own verification rules. For instance, dividend and interest income requires a two-year history of receipt. Additionally, pension income may only require an award letter, while you must verify that 401k distributions will continue for at least 3 years based on the current balance.
No matter what your retirement income situation, run it by your lender as soon as possible when you apply so there are no surprises later.
If you’re worried about being able to afford a monthly mortgage payment, particularly once you stop working or your medical expenses increase over time, there is another option: a reverse mortgage loan.
We’ll discuss reverse mortgages in more depth further down. But for a quick overview, reverse mortgages may be used on a primary residence, and you are not obligated to make a monthly principal and interest payment. You must continue paying property taxes, insurance, and upkeep on the home. But you do not have to make monthly mortgage payments. Instead, the full loan balance comes due when you pass away or leave the home.
Additionally, you can take cash out of the home to supplement your retirement cash flow. With a reverse mortgage, you can borrow against your home equity and receive monthly cash advances, a line of credit, a lump-sum payment, or a combination of cash advances and a line of credit.
You can also get a reverse mortgage to purchase a new home.
Learn more: Why a Reverse Mortgage Loan Should Be in Your Retirement Plan
Buying a home in retirement can be a smart move for a number of reasons.
If you are on a fixed income, or you anticipate living on a fixed income after you’ve fully retired, a fixed-rate mortgage gives you control over your budget.
Although property taxes and homeowners insurance costs can fluctuate, your principal and interest payments remain the same. That can bring more peace of mind, and make financial planning much less challenging, than trying to anticipate whether your rent will increase each year.
If you’re thinking about getting a mortgage, it’s to your advantage to apply for one when rates are low. A low interest rate also helps keep your housing payments manageable.
Related reading: What You Should Know About Reverse Mortgage Interest Rates
You can deduct mortgage interest and property taxes on your income tax return each year, reducing your tax obligations. Plus, many states give senior citizens a break on their property taxes. So you may owe less than younger homeowners, and you can deduct property taxes on your yearly return.
Buying a home in retirement can also bring stability to your overall living situation. If you’re a renter, your landlord can hike your rent every year. The renewal of your lease is also up to your landlord. If your landlord decides to sell the property — or even rent it to a family member — you may have to look for another place, at a higher rent. Your home, though, is your castle, as long as you pay the mortgage and other costs required, such as property taxes.
Many older people want or need to reconfigure their homes to age in place, which may involve installing handrails or renovating rooms to improve mobility. You can make any changes you want if you own the home, but if you’re renting, the landlord may forbid major overhauls or modifications.
The criteria for getting a mortgage is the same for retirees as it is for working people. In both cases, lenders will look for the ability to repay the loan.
Your best bet is to get preapproved for a loan before you start looking at houses. A lender will review your income sources, assets, savings, and debts to determine how much you can afford to borrow.
They will then issue a preapproval letter, which will tell real estate agents and sellers that the lender has already reviewed your finances and confirmed that you can afford to buy a home.
Learn more about getting preapproved here.
If you’re 62 or older, it’s a good idea to talk with a lender that offers traditional mortgages and reverse mortgage loans. They can tell you which loan products you qualify for, and they can explain the pros and cons of each.
You’ll also want to talk with your certified financial planner or wealth advisor about your retirement budget and how much you could comfortably spend on a mortgage payment, taxes, maintenance costs, and other housing-related expenses.
Your lender will need the following documents, depending on the type of income you receive:
Let’s talk more about reverse mortgages.
As noted above, a reverse mortgage loan is available to qualifying homeowners or homebuyers who are 62 or older.
The most common type of reverse mortgage is a Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). A HECM allows you to borrow against the equity in your home.
You receive that equity as cash advances, a lump sum payment, a line of credit, or a combination of cash advances and a line of credit. So, you are receiving funds from the lender rather than making payments on a loan — the reverse of a traditional mortgage.
Perhaps the biggest benefit of a reverse mortgage is that you do not have to make a monthly mortgage payment, although you can, as long as you pay the property taxes, homeowners insurance, and upkeep expenses. The full loan amount comes due if you pass away or move out of the home.
Importantly, you can use HECM funds however you choose. Perhaps you love your current home, but you’ll need to renovate the bathrooms to make them safer and more accessible as you age. Maybe a loved one has begun using a wheelchair or cane, and you want to install a ramp to the home for them. You can use money received from a HECM loan to make the necessary changes to continue living in and enjoying your home for many years to come.
A standard HECM may be used on a home you already own, though it must be your primary residence, or where you live most of the year.
If you want to buy a new home, you might consider a HECM for Purchase. Like standard HECMs, HECM for Purchase Loans have no monthly payment obligation, as long as you pay the property taxes and insurance and maintain the home. The loan comes due when you pass away or leave the home. Although there’s no obligation to make the monthly payment, you can make a payment if you choose.
Learn more: How To Use a Reverse Mortgage Loan to Purchase a Home
The balance of a reverse mortgage does not come due until you leave the home or pass away, as long as you continue paying property taxes, insurance, and maintain the home.
However, if you opt not to make monthly payments, your equity will decrease over time. That means that if your heirs choose to sell the home to pay off the loan, there may not be much left over from the sale proceeds for them.
The positive side of that is that all reverse mortgages are non-recourse loans, so you and your heirs can never owe more than the fair market value of the home**.
To learn more about what a reverse mortgage means for your heirs, see our guide on how a reverse mortgage works when you die.
If you don't have sufficient monthly income to qualify for a home loan, and a reverse mortgage is not an option for you, some lenders offer asset depletion loans.
With an asset depletion loan, lenders review your liquid assets, meaning cash accounts such as checking and savings plus retirement and investment accounts held in cash, stocks, and bonds. They will calculate whether your liquid assets will provide enough income to pay off your mortgage over its term, in addition to your regular living expenses.
Most likely, your cash assets will be valued at 100% of their current worth. Some lenders, however, may value stocks at a percentage of their current worth, to account for future fluctuation in stock values.
Asset depletion loans can be good for folks with plenty of assets but little income. Those who have considerable assets from a home sale or significant savings could benefit from this loan type.
If you’re not able to get approved for a mortgage on your own, you might consider asking one of your adult children or another trusted person to co-sign for you. Lenders sometimes approve loans with co-signers if the co-signer has strong credit and sufficient income to qualify for the mortgage.
Co-signers are responsible for the repayment of the loan if you are no longer able to make payments, so make sure to review your finances carefully with them. They should be clear on the terms and payment amounts and understand your income and assets and how those might change.
Should you no longer be able to live in the home or eventually move to an assisted living facility, your co-signer may need to step in to manage your payments or the sale of the house. You may want to meet with them and your wealth advisor together so they can confidently make the decision to take out the loan with you.
Adult children can purchase a home for elderly parents who can’t qualify on their own.
This is different from a co-signer arrangement: the children purchase the home in their own name. Their parents do not need to be on the loan.
The adult children receive the same mortgage rates and terms as they would on a home they plan to live in. That means lower down payment requirements and better rates compared to an investment property mortgage.
Find out more about the Family Opportunity Mortgage here.
Qualifying for a mortgage is only part of buying a home in retirement. Then comes finding the right home.
Here are some aspects to consider when looking at home purchase options:
You qualify for a mortgage after retirement the same way that you qualify before retirement — by demonstrating your ability to pay to lenders. Lenders will look at your income, assets, credit score, and DTI. If you’re still working, you can use your wages to qualify, as well as Social Security benefits, investment accounts, pension disbursements, annuities, and proceeds from the sale of assets such as a previous home or business.
Yes. Federal law prohibits lenders from discriminating against borrowers based on age. You can qualify for a mortgage at any age, provided you have sufficient income to afford the loan and meet other financial and credit requirements.
Yes, you can get a mortgage if you’re retired. Lenders will require documentation of your retirement income and assets, and they’ll assess your credit score, DTI, and overall financial circumstances, as they would with any borrower. If you are 62 or older, you may also qualify for a reverse mortgage on your current home or a reverse mortgage for purchase to buy a new home.
You can get a mortgage at any age, as long as you meet the financial requirements to get approved. Buying a home in retirement with either a forward or reverse mortgage can be a positive financial move. Homeownership stabilizes your expenses, builds equity, and allows you to enjoy retirement in a home that’s comfortable and meets your needs.
*This advertisement does not constitute tax advice. Please consult a tax advisor regarding your specific situation.
**There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes and insurance and maintaining the home. Credit subject to age, property and some limited debt qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.
Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Reverse mortgage borrowers are required to obtain an eligibility certificate by receiving counseling sessions with a HUD-approved agency. The youngest borrower must be at least 62 years old. Monthly reverse mortgage advances may affect eligibility for some other programs. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.