Are You Ever Too Old to Get a Mortgage?
If you’re buying or refinancing, the answer may surprise you
Whether you’re looking for help financing the Victorian fixer-upper of your dreams, tapping the value of the house where you’ve been for years, or taking advantage of rates that are still at near-historic lows, you might be surprised at how mortgage lenders rate older borrowers.
• Age doesn’t matter. Counterintuitive as it may sound, your loan application for a mortgage to be repaid over 30 years looks the same to lenders whether you are 90 years old or 40. A web of federal civil rights laws, including the Equal Credit Opportunity Act and the Fair Housing Act, make it illegal for a creditor to discriminate on the basis of an adult’s age.
• Being debt-free may pose a problem. Greg McBride, chief financial analyst at Bankrate, says an unexpected stumbling block can be that you don’t have a credit rating if you haven’t recently been in debt. “It used to be that you looked to retire debt-free. You may have a great credit history, but if you’re out of the credit game now—debit cards don’t count, and you’ve paid off your car loan, you’ve paid off your mortgage—there’s no recent activity to give you a score. It’s one of the reasons to use a credit card even if you pay it off completely each month, just so you have active credit lines to show a current credit history.” A strong credit score can mean you’ll be approved with a better borrowing rate.
• Retirement income is still income. Mortgage applications usually start with questions about income to document how you will make monthly payments. In place of the employed person’s pay stub and W-2, retirees can provide a Social Security or pension award letter. The sources of income, unlike your credit score, do not affect the calculation of how much debt you can carry, according to Bill Banfield, executive vice president of Capital Markets at Quicken Loans: “We don’t have different guidelines based on profession or employment.” Fannie Mae and Freddie Mac, which largely set the standards for the secondary market in mortgages, usually require that monthly housing and debt costs (including real estate taxes and homeowner’s insurance) account for no more than 50 percent of monthly income.
• Your savings can work as income. Specialized mortgage lenders often associated with stockbrokers like Merrill Lynch and JP Morgan cater to the affluent with alternative forms of underwriting of some of the same kinds of 15- and 30-year mortgages. If you have investments, ask the firm where they are held about mortgages. Morgan Stanley Private Bank, for instance, has an Asset Pro-Forma Method for attributing income from investment accounts, so that wealth can qualify you for a mortgage even if you’re without income. A million-dollar investment account with stocks and bonds, for instance, could typically be calculated as the equivalent of $35,000 a year in income (assuming 5 percent of annual income, after a conservative 30 percent discount for market risk). The borrower is not required to cash in these assets—the investments are merely used to demonstrate an ability to make mortgage payments. Another industry term for this kind of loan is “asset depletion mortgage.”
These assumptions are actually more conservative than Fannie Mae and Freddie Mac guidelines, which are also used by mortgage lenders industry-wide. The Fannie and Freddie rules can qualify the same million-dollar investment account—it could be retirement savings in an IRA or a 401(k)—toward a “three-year continuance of income.” Using this math, the million-dollar account, divided into three years, is the equivalent of an annual income of $233,333 ($1,000,000 less 30 percent market-risk discount, divided into three years).
• You don’t need to put down 20 percent. “The myth is still out there,” says Quicken’s Banfield. “But Fannie and Freddie programs allow for mortgages that are 97 percent of a home purchase. FHA mortgages go to 96.5 percent. The Veterans Administration will do 100 percent.”
• Reverse mortgages can be legit. They can be a lifeline for retirees who need to tap home equity for living expenses, and, according to Svenja Gudell, Zillow’s chief economist, “Boomers have, on average, just over $125,000 in home equity.” A “cash out” mortgage or home equity line of credit can also tap this value. But instead of paying down the loan over time—as in a typical 15- or 30-year mortgage—the reverse mortgage loan compounds, with the growing loan to be repaid when the borrower moves out or dies. “Bad actors have given reverse mortgages a bad name,” says Bankrate’s McBride, “but the product is sound.” Borrowers must be at least 62 years old and are required to go through reverse mortgage counseling. Players who offer Home Equity Conversion Mortgages (HECM) through the Federal Housing Administration include Quicken Loans’ One Reverse Mortgage. CEO Gregg Smith says, “the home should be a key asset in planning for retirement.”