A retirement mortgage can be a great solution for those nearing retirement age or seniors needing funds. Because retirees don’t have steady incomes, borrowing can be more difficult for them. Retirement mortgages can sometimes offer a solution.
Understanding a Retirement Mortgage
A “retirement mortgage” is a generic term used to describe a wide assortment of loans tailored to the needs of retired borrowers. Depending on the specific loan product, borrowers may not need to supply standard income documents like a W-2 or pay stubs to apply. There is no age requirement with some products, so if you’ve retired early, this may be the way to go.
When Is a Retirement Mortgage the Best Choice?
Deciding when or if a retirement mortgage is right for you depends on your lifestyle and financial situation. Retirement mortgages often consider sources of income beyond a steady paycheck.
Lenders may also look at the possibility of one partner dying (in a joint loan situation) and whether the survivor can afford the mortgage alone.
Retirement Mortgage Loan Options to Consider
If you’re in or nearing retirement, you have many lending options to consider. Some loans noted here may be specifically for seniors, while others are loans available to a wide range of people and may be of interest to older borrowers. Some of your choices include:
Asset Depletion Loans
These mortgages allow you to convert your assets into income.
Best to Use: When you have a high net worth.
Where to Find: Larger banks and portfolio lenders.
Possible Disadvantage: You or your survivor may outlive assets.
Bank Statement Loans
If you receive regular, large deposits from a business buyout or royalties, you can document your income with bank statements for the previous 12-24 months.
Best to Use: When you have regular but varying large deposits.
Where to Find: Banks, credit unions, savings and loans, mortgage brokers.
Possible Disadvantage: You typically need to have a large inflow of cash.
Fannie Mae and Freddie Mac Mortgages
The traditional Fannie Mae and Freddie Mac government-sponsored loans that require at least a 3% down payment are still available to you. If you have enough liquid assets to make a 20% down payment, these loans have no mortgage insurance requirement.
Best to Use: When you can afford a 20% down payment.
Where to Find: Banks, credit unions, savings and loans, mortgage brokers.
Possible Disadvantage: You must have the 20% down to carry a mortgage into retirement.
Reverse Mortgages
A reverse mortgage is a type of home equity loan only available to people 62 and older. With a reverse mortgage, borrowers are given access to a portion of the equity they have in the home and not required to make monthly mortgage payments as a condition of the loan. Borrowers do have financial obligations which include paying property taxes and insurance, as well as other fees associated with homeownership. The loan comes due in full when the borrower dies or leaves the property.
Best to Use: As a source of funds to avoid tapping other investments, to make necessary alterations to a home for age in place, as an emergency reserve.
Where to Find: Multiple lenders offer reverse mortgages and home equity conversion mortgages (HECMs) or government-backed reverse mortgages.
Possible Disadvantage: Because interest accrues on the balance without being paid down, the loan payoff will be sizeable. It’s important to understand and plan for this eventuality, especially with your heirs. Heirs will not be saddled with debt, or required to pay off more than the value of the home, but may not be able to inherit the home.
EquityAvail
This loan combines aspects of forward and reverse mortgages to deliver an alternative for homeowners at or near retirement. This hybrid product lowers monthly mortgage payments for ten years and then eliminates them altogether.
Best to Use: As a transition to retirement.
Where to Find: Proprietary to Finance of America Reverse; available through independent loan officers.
Possible Disadvantage: This is a newer product, and some people and financial experts may not yet be familiar with it and how it works.
FHA Loans
The Federal Housing Administration (FHA) also has loans available to seniors. If you have a credit score of 500-579, you can qualify for 10% down payments. If your score is 580 or higher, the down payment is 3.5%.
Best to Use: When you have a lower credit score.
Where to Find: FHA-approved lenders.
Possible Disadvantage: There’s no escaping FHA mortgage insurance, regardless of your credit score.
USDA Loans
The U.S. Department of Agriculture (USDA) guarantees a loan with no down payments are required. Instead, you pay an up-front and annual guarantee fee instead of mortgage insurance. The catch with this loan is your home must be in a USDA-designated rural area.
Best to Use: When you have a moderate income and want to retire in a rural area.
Where to Find: To determine your eligibility, check the USDA website.
Possible Disadvantage: You need to be able to afford the up-front fee.
VA Loans
These loans for eligible military borrowers require no down payment or equity and have flexible debt-to-income ratio guidelines. The U.S. Department of Veterans Affairs (VA) backs the loans. Though the VA doesn’t set a minimum credit score to qualify, VA-approved lenders often require a score of at least 620. No mortgage insurance is required, but lenders can charge a funding fee to offset the program cost.
Best to Use: When you are a veteran who cannot afford a down payment or have low equity in your property.
Where to Find: VA-approved lenders.
Possible Disadvantage: Need to be able to afford the funding fee.
In the end, the choice of which retirement mortgage is best for you should be based on how much capital you initially require, your age, projected income, and property value. It’s best to consult with a qualified financial advisor to determine which is right for you.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
