How Seniors on Social Security Can Secure a Mortgage

Over 5% of the US population relies on Social Security as their only source of income. 

If you’re part of the 5% and above 65, you may wonder: are there special home loans for seniors on Social Security?

The answer is yes, but the eligibility criteria can be pretty tricky. Here’s what you need to know about these mortgage options. 

Challenges of Obtaining Mortgage for Seniors on Social Security 

Despite various laws against age discrimination in the US, systemic ageism is still prevalent in the loan business. In fact, this 2023 study found that seniors are more likely to get rejected for their mortgage applications. 

Today, seniors on Social Security face quite a few challenges when trying to obtain a mortgage.

1. No Regular Income

Lenders typically review your W-2s and tax returns to determine whether or not you can afford to repay the loan. However, seniors on Social Security typically don’t have the monthly cash flow to prove their creditworthiness. 

You’ll need to prove that your Social Security funds are fully accessible, meaning you can draw them without penalties. You’ll also need to guarantee that these funds can cover living costs on top of the mortgage payments. 

2. Income Ending in 3 Years (Retirement)

Most lenders want to verify that your income will keep coming for at least three years after you obtain the mortgage. But you can't meet this requirement if you’re about to retire in one or two years. 

That means you can’t qualify for the loan, even if you have the means to repay it. The solution? Don’t tell your lender you’re about to retire – you’re not required to. 

Eligibility Criteria for Mortgages for Over 60s

Due to the Equal Credit Opportunity Act, lenders can’t refuse a loan based on the borrower’s age. That means the eligibility criteria for mortgages for seniors are the same as those for any other loan. 

• Proof of income
• Competitive loan-to-value ratio
• Proof of assets
• Competitive debt-to-income ratio
• Good credit score

But as a senior, it’s tough to meet those criteria, especially in terms of income. Many ask: what exactly counts as income for a mortgage loan? Is a pension considered income to get a real estate loan? 

Luckily, the answer is yes. Any type of retirement income, including IRA, long-term disability, 401(k), and even Social Security, counts as income. 

Types of Mortgage Assistance for Seniors

What are your options as a senior on Social Security? Let’s look at some of them.

1. Bank Statement Loans

Bank statement loans are good for seniors on Social Security since it’s a non-traditional income source. You won’t need to show your W-2s or pay stubs, but your personal/business bank cash flow instead. That means at least 3 to 6 months of bank statements. 

You’ll also need a decent credit score, at least 620, and enough cash reserves to cover a few months of mortgage payments. These loans can be used to either buy or refinance properties. 

Unfortunately, the interest rates can be pretty high – 10-20% of the property value. Since these are non-conforming loans, they’re easier to qualify for.

2. Reverse Mortgage Loans

Also known as HECMs, reverse mortgages are insured by the DHA for homeowners over 62. These loans don’t have monthly repayment schedules and can be financed as a lump sum or via a line of credit. 

To qualify, the property you’re financing must be your primary residence and have substantial equity. This loan is also tax-free and will cover your living expenses and home improvements. It will not impact your Social Security benefits. 

You won’t need to repay the loan until you’re no longer living in that house. Unfortunately, HECMs dissolve home equity over time, leaving less for your heirs. Failing to cover the property taxes and insurance can also lead to foreclosure. 

3. Asset Depletion Loans

Asset depletion loans are pretty similar to traditional mortgages. The only difference is how the lender calculates your income. You’ll also be eligible if you have enough cash reserves and the right accounts.

You’ll qualify for the loan based on your liquid assets, not your income source. The sum of all your assets will be divided into a monthly income and determine whether you can repay the loan.

So, if you have $1 million in savings, it translates to a monthly income of about $2,700. If that covers the monthly mortgage payments, you qualify.

Benefits of Reverse Mortgages for Seniors on Social Security

It’s safe to say that reverse mortgages are the best type of loan for seniors on Social Security. Here’s why. 

1. Higher Loan Limits

Reverse mortgages have generous loan limits. In fact, you can borrow up to $4 million via line of credit or in a lump sum. This is four times higher than the annual limit for traditional loans.

2. Additional Income for Retirees

Reverse mortgages are great for seniors who may not have many cash savings or investments. This loan will let you turn your illiquid assets into additional income if you have enough equity in your properties.

3. Paying Off Existing Home Loan

You don’t need to pay off any other home loans before you get a reverse mortgage. In fact, you can use the loan’s proceeds to pay your existing home loan. Plus, you don’t have to give monthly payments.

4. Tax Liability

According to the IRS, reverse mortgages are not taxable. That’s because these are considered to be loan advances instead of incomes. 

Home Loans for Seniors on Social Security: Tips and Tricks

Getting a home loan isn’t as simple as accepting the first offer. Here are some smart tips to help you make the right choice. 

• Understand the different loan types. You may find specific loan types, like reverse mortgages or FHA loans, that cater to your situation.
• Check the interest rates. Given the long-term nature of home loans, don’t settle for higher interest rates – these will add up over time. 
• Make a higher down payment to reduce your monthly payments. You can use your savings and assets, but make sure you still have an emergency fund.
• Include all sources of income on the loan application. Your Social Security, pensions, and any part-time work will strengthen your loan application.
• Consider your health and future costs when deciding on loan terms. You don't want to overextend your finances to your heirs.

Potential Risks of Getting a Mortgage as a Senior on Social Security

Before you invest in a mortgage as a senior on Social Security, you should also be aware of the potential risks and drawbacks. 

1. impact on Retirement Savings

Mortgage payments can deplete your retirement savings pretty quickly. This is especially true if Social Security is your primary source of income. This can make it hard to manage unexpected expenses after taking the loan.

2. Potential Foreclosure

Fixed income from Social Security may not always cover fluctuating mortgage expenses. You’ll be responsible for the interest rates, home maintenance, and property taxes. If you fail to make these payments, the lender has the right to foreclose.

3. Limited Cash Flow

Monthly mortgage payments can eat up a big portion of your fixed income. That means you’ll have limited cash available for crucial expenses like healthcare and emergencies. It could also affect the inheritance you plan to leave for your heirs.

Getting Approved for a Mortgage as a Senior on Social Security

As we mentioned, it’s a lot harder to qualify for mortgage loans once you’re a senior. Here’s what you can do to increase your chances. 

1. Paying Off Existing Debt

If you already have tons of debt crowding your record, you may scare off potential buyers. Paying off this debt doesn’t just make you a low-risk borrower, but it also increases your credit score. You can pay off smaller debts like credit card balances or car loans. 

2. Increasing Your Down Payment

Offering a larger down payment can reduce the lender's risk drastically. The lender will be able to trust that you can repay the loan when the term ends. Plus, it’ll reduce the amount you pay in the end. 

3. Having a Co-Signer

You can also add a co-signer to strengthen your applicants. For instance, your children or family members may agree to pay off the loan by your side to reduce the lender’s risk. This may also qualify you for loans that don’t often accept senior borrowers. 

Mortgage Lenders for Seniors on Social Security

While the options for seniors on Social Security aren’t as generous as they could be, there are still a few reputable lenders offering great rates. Here are our top four picks.

Takeaway

Finding the right mortgage for seniors can ensure peace of mind in retirement. But if you’re on Social Security, you may find it trickier to secure a loan that meets your needs. 

Luckily, reverse mortgages can be a great solution for over 60s relying on Social Security. Before you pick a lender, ask a few screening questions. To reduce the efforts on your end, you can also hire a financial advisor to vet the lender for you.