It might seem as if the only people taking out home loans these days are well short of their retirement years – but surprisingly, that’s not entirely true. In 2021, buyers 65 and older accounted for roughly one-eighth of all mortgages originated. Whether downsizing, upsizing, moving across town or heading for sunnier climes, older Americans are a big part of the home mortgage scene.
Given the fact that many of these seniors have a solid history of paying their bills on time, one might think older buyers are a shoo-in for mortgage approval. But according to this recent Wall Street Journal analysis, many seniors who are shopping for homes actually find that getting approved for a mortgage is harder than they had expected. The gist of the article, written by reporter Robyn Friedman, is that older buyers need to do their homework – no pun intended – and anticipate some potential pushback when it comes to qualifying for the mortgage on that dream house.
(Note that accessing the Wall Street Journal article may require a paid subscription.)
Older Buyers Face “Daunting” Challenges
“The process of getting a mortgage can be a challenging one for applicants of any age,” Friedman writes. “But for older borrowers, those who are no longer drawing a paycheck or are relying on passive income, proving to a lender that they have sufficient income and assets to qualify can be even more daunting.”
We were surprised to learn just how many older home buyers are in the market for a mortgage. “According to Home Mortgage Disclosure Act data provided to The Wall Street Journal by the Consumer Financial Protection Bureau,” Friedman states, “13 percent of all mortgages originated in 2021 were by people 65 years of age and older. That is over 1.9 million mortgages.”
Ageism is Illegal, but Lenders Still Consider “Age-Related Factors”
Friedman explains that mortgage lenders will typically approve or disapprove loans based on commonly-understood gauges including the applicant’s income, assets, debts and credit score. “Discrimination against credit applicants on the basis of age is prohibited by the Equal Credit Opportunity Act,” she writes. “However, while lenders may not consider age per se when qualifying an applicant, they can look at age-related factors such as whether that applicant’s income might drop because they are about to retire.”
In other words, lenders “scrutinize not only the source of a borrower’s income, but the likelihood that it will continue as well,” says the Wall Street Journal. As Charlie Nilsen, a Santa Clara-based private banker, told Friedman. “Regardless of your work status, there is still a requirement that you be able to support a mortgage, with verified cash flow and income.”
Methods of Verifying Income Vary
Many older buyers have multiple income streams, and they all can factor in loan approval. “All types of income, active and passive, are included when qualifying an applicant for a mortgage,” says Friedman. “But the process of verifying that income may vary.”
One loan official, Brian Rugg of loanDepot Inc, explained the process. “For example,” he told Friedman, “when an individual receives Social Security benefits, all we have to do is verify that the award was to the individual we’re lending to or that they are the beneficiary of that award. With Social Security retirement income, it’s typically a lifetime guarantee, so there’s no need to validate the continuance of the income.”
However, says the article, “For retirees who rely on an investment portfolio to cover living expenses, qualifying for a mortgage is slightly different, experts say, and the methods vary depending on whether that retiree is taking required minimum distributions, withdrawals from retirement accounts that are required by the IRS, or just dipping into a portfolio when he or she needs funds.”
Bill Banfield of Rocket Mortgage told Friedman that, for borrowers taking required minimum distributions from an IRA or 401(k), “the income they receive can be used for qualifying as long as the account has sufficient assets for those distributions to continue for three years.”
However, things get more complicated for applicants who are withdrawing money from nonretirement accounts when they need cash. We lack the space to go into detail here, but suffice it to say that buyers relying on discretionary withdrawals from these types of accounts are going to need some good financial advice before assuming the mortgage amount for which they might get approved.
Friedman includes three things she suggests older adults should consider before applying for a mortgage.
Seek Out a Lender Experiences with Seniors
Most home buyers don’t compare lenders, according to the article. “A survey released in November 2022 by Zillow Home Loans found that 72 percent of prospective home buyers had not shopped around, nor had any plans to shop around, for a mortgage that best suits their financial situation,” Friedman writes. “But, working with a lender who has experience with older applicants can mean the difference between approval and rejection.”
She cited one older buyer with an 800 FICO score and no debt. “He called a lending institution he banked with to ask about a cash-out mortgage, and they asked if he was employed. He said no, and they told him they couldn’t help him,” says Friedman. “Although he had other sources of income, they didn’t ask about it. When he called the lender back to explain that he had other sources of income, they took his application, and he qualified for the mortgage.”
That’s one reason why many experts recommend dealing with a mortgage officer in person instead of filling out a mortgage application online. Online applications may lack the space to list all your income. “You need to speak to an expert, someone who is experienced and will give you good advice,” one expert said.
If You’re a Cosigner for Someone Else, Prepare for Challenges
Most of us know that cosigning a loan opens up a potential can of worms better left untouched. “If you’ve cosigned for a home or car loan for children or grandchildren, be aware that those loans can affect your credit score,” Friedman writes.
According to Rocket Mortgage’s Banfield, these problems can jeopardize your loan approval, “Any derogatory payments affect the credit score of the retired person,” he told the Wall Street Journal. “Even if there is no delinquency, it’s another debt reported on your credit report, so even if you have all the money saved up that you want, if your credit score drops below eligible levels, you won’t qualify for a mortgage.”
Consider Alternatives for Short-Term Home Financing
If your financial need is short term – waiting to sell one home, for example, before fulfilling a contingent offer on another – you may have better options. “For short-term needs, such as bridge financing for those selling a home and buying a new one, there are alternatives other than a home mortgage,” says Friedman.
“They can do an asset-based loan or an investment credit line and borrow against their investment portfolio to pay cash for the new home,” said Michael Silver, a certified financial planner in Florida. “I have many clients who have done that, but it’s always a shorter-term solution where you have a plan to pay it back because the rate fluctuates monthly.” Mr. Silver said the rates are generally 1.5 percentage points over the 30-day Libor or federal-funds rates, and adjust monthly.
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(originally reported at www.wsj.com)