Mortgages for Seniors: Getting a Home Loan on Social Security Benefits

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FACT-CHECKED
Published Feb. 9, 2022
Senior couple discussing with a financial advisor whether they can get a mortgage or refinance on Social Security retirement benefits.

As you get older, you may find yourself evaluating your finances and considering changes to your home that make sense for your current situation.

Perhaps you’re thinking of selling your home to downsize or move closer to family members. Or maybe you want to stay put but are interested in refinancing to save money. Regardless of your reasons and whether you’re already retired, the good news is that there are mortgage options for older adults.

If you’re on a fixed income, check out this guide to explore the different home loans for senior citizens and ways to refinance:

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Can You Get a Mortgage With Only Social Security Income?

Let’s get one myth out of the way — you’re never too old for a 30-year mortgage. Whether you’re taking out a new mortgage or refinancing your existing loan, your age shouldn’t be a factor in whether you’re approved. That’s because the Equal Credit Opportunity Act prohibits lenders from discriminating based on age, race, religion, sex, marital status, or national origin.

What matters is your financial situation and how it impacts your ability to pay back the loan. Specifically, lenders look at your credit, debts, income, and assets. This includes Social Security benefits, 401(k)s, individual retirement accounts, investment accounts, and pensions. However, if your only income is from Social Security benefits, then you might be concerned about your ability to get approved for a loan.

So, can you refinance a home on Social Security retirement benefits? While you may need to provide more documentation regarding your assets compared to someone who receives regular income from work, lenders just want to see that you’ll be able to make the payments. Your monthly payments depend on the size of the mortgage, the interest rate, and the loan term — so it’s possible to get a loan or refinance on Social Security benefits, if you’re qualified.

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Mortgage Options for Older Adults

There are many reasons to refinance or get a mortgage as an older adult. If your kids have moved out and you no longer need all that space, you could be looking to sell your house and downsize. Or you may find that your property has become too difficult to maintain, and you’re looking for a home with more convenient features. Even if you’re thinking about aging in place, you might be able to refinance to save money or tap into your home equity.

The best type of loan or refinance program for seniors will depend on your goals and the specifics of your financial situation. Here’s a breakdown of different loans for seniors on Social Security benefits.

Asset depletion mortgage

With an asset depletion mortgage, the lender focuses on your savings rather than your income when assessing your eligibility. This means an asset depletion mortgage could be a good option for borrowers who are retired or self-employed.

To calculate your monthly income, the lender adds up your liquid assets and divides the total by 360, which is the number of monthly payments made with a 30-year mortgage. So, if you have $800,000 in savings, your monthly income is roughly $2,200.

When to consider an asset depletion mortgage

An asset depletion mortgage could be suitable for qualified borrowers in these situations:

  • You are already retired or plan to retire soon, and have a sizable nest egg.
  • You have nontraditional sources of income but plenty of savings.

“Asset depletion loans can be great choices for people with large retirement funds and minimal income, since it considers assets as a form of income during the application process,” says Martin Orefice, CEO of Rent To Own Labs, a real estate platform based in Orlando, Florida. “If you choose to go this route, make sure that you’re correctly counting all of your assets and income.”

Tip for getting an asset depletion mortgage

If you’re applying for an asset depletion mortgage, keep in mind that lenders may evaluate:

  • Checking and savings accounts.
  • Money market accounts.
  • Certificates of deposit.
  • IRAs and 401(k)s.
  • Stocks, bonds, mutual funds, and other investment accounts.

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Reverse mortgage

Think of a reverse mortgage as the inverse of a traditional mortgage. Instead of the borrower making monthly mortgage payments, the lender pays the borrower by providing an advance on part of their home equity. Essentially, a reverse mortgage lets you gradually turn your equity into cash without selling your home, and you can use that money to supplement your income while you still live there.

However, borrowers should understand that a reverse mortgage comes with considerable drawbacks. Each month, you will be reducing the equity you’ve built and increasing the amount you owe. And if you move away or die, the loan needs to be repaid — which often means selling the home to come up with the cash.

When to consider a reverse mortgage

Qualified borrowers may consider getting a reverse mortgage if the following apply:

  • You are at least 62 years old.
  • You need to supplement your income.
  • You’re OK with losing equity.
  • You aren’t planning to pass down your home to any heirs.

Tip for getting a reverse mortgage

While a reverse mortgage might sound tempting, you shouldn’t get one without fully understanding the terms and drawbacks. Some disadvantages of a reverse mortgage include:

  • You’ll have fewer assets to leave to your heirs.
  • To get a reverse mortgage, you’ll likely need to pay closing costs.
  • The total amount you owe will grow each month as interest is added.
  • You can’t deduct the interest on a reverse mortgage until you pay it off partially or in full.
  • You’re still responsible for property taxes, homeowners insurance, maintenance, and utilities.

“Another big concern here is that a reverse mortgage can make it much more financially difficult to move out of your house,” Orefice says.

If you’re planning to move soon, then the costs of closing on a reverse mortgage might not be worth it. Getting a reverse mortgage also means having less equity to work with if you’re looking to buy a new home.

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Home equity conversion mortgage

A home equity conversion mortgage is a type of reverse mortgage insured by the U.S. Department of Housing and Urban Development. There’s no specific income requirement for HECMs. Qualified borrowers can take out funds based on their age; current interest rates; and the lesser of the home’s appraised value, the Federal Housing Administration’s mortgage limit for HECMs, or the home’s sales price.

HECMs can be more costly than traditional mortgages. So, before taking out an HECM, you’re required to meet with a counselor from a government-approved housing counseling agency. They are responsible for explaining the costs and financial implications of the loan, as well as alternative options.

When to consider an HECM

Borrower requirements for an HECM include:

  • You are at least 62 years old.
  • The home is your primary residence.
  • You own the home outright or have paid down a significant amount.
  • You’re financially capable of paying ongoing property charges like homeowners insurance, property taxes, and homeowners association fees.
  • You’re not delinquent on any federal debt.

Tip for getting an HECM

Depending on whether you get a fixed-rate or adjustable-rate mortgage, there are different payment plan options for an HECM:

  • Single-disbursement lump sum: This only applies to fixed-rate mortgages and usually offers less money compared to the other options.
  • Tenure: If you choose an ARM, this option provides fixed monthly payments for as long as you live in the home.
  • Term: You get fixed monthly payments for a specified period. This is available for ARMs.
  • Line of credit: This ARM option allows you to draw funds in varying amounts whenever you want until the line of credit is used up.
  • Modified tenure: You receive a combination of fixed monthly payments and a line of credit for as long as you live in your home.
  • Modified term: This option provides a combination of fixed monthly payments and a line of credit for a period of your choosing.

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Rate-and-term refinance

A rate-and-term refinance is the most common refinancing option. It allows qualified borrowers to pay off their current mortgage with money from a new loan that has different terms. This can mean lowering the mortgage interest rate to save money, adjusting the loan term to build equity faster, or switching the interest rate type between an ARM and a fixed-rate mortgage for more stability in the monthly payments.

When to consider a rate-and-term refinance

Here are some reasons why you might consider getting a rate-and-term refinance:

  • Market interest rates have dropped significantly since you took out your mortgage, and refinancing would help you save money.
  • Money has gotten tighter, and you want to reduce your monthly payments by extending your loan term.
  • You can afford higher monthly payments now, and you want to pay off your loan sooner to decrease the total amount of interest you’re charged.
  • You want to move from an ARM to a fixed-rate mortgage, which would provide greater predictability in terms of your monthly payments.

Tip for getting a rate-and-term refinance

Here are a few factors that will influence whether borrowers are approved for a rate-and-term refinance:

  • Equity: You typically need at least 20% equity in your home before you can refinance.
  • Debt-to-income ratio: If your monthly debt obligations are too high compared with how much you’re earning, lenders might not have confidence in your ability to repay a mortgage.
  • Credit score: To refinance a conventional loan, you generally need a minimum credit score of 620. Government-backed loans come with their own requirements, though some might not have a minimum score.

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Cash-out refinance

A cash-out refinance allows qualified borrowers to tap into the equity they have built in their home and withdraw cash. With this type of refinance, a new loan with a higher value replaces the borrower’s current mortgage, and they keep the difference in cash.

Let’s say you still owe $100,000 on your mortgage. You could refinance to a new loan worth $120,000 and receive the difference of $20,000 in cash after closing.

One major perk of a cash-out refinance is that you can use the additional money for anything you want, such as consolidating debt or covering renovations to increase the value of your home.

When to consider a cash-out refinance

Here are some signs that a cash-out refinance might be a viable option:

  • You have built a solid amount of equity in your home.
  • You meet the requirements for a cash-out refinance.
  • You’re looking to accomplish a financial goal, such as paying down debt or covering a major expense.
  • Refinancing would benefit your situation in the long term.

Tip for getting a cash-out refinance

While the rules may vary depending on the lender, a cash-out refinance typically requires the borrower to have at least 20% equity. This means borrowers can refinance up to 80% of the home’s value.

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Home equity loan

A home equity loan is another way that qualified borrowers can take advantage of their equity. Unlike a cash-out refinance — which has the additional borrowed amount baked into the mortgage principal — a home equity loan is a lump sum that’s separate from your mortgage.

Since the property serves as collateral, home equity loans typically have a fixed interest rate that’s often lower than the rates on personal loans. If you’re unable to repay the debt, then the lender can foreclose on your property — which is why a home equity loan is also known as a second mortgage.

Unlike personal loans or lines of credit, home equity loans come with closing costs.

When to consider a home equity loan

A home equity loan could make sense if the following apply to your situation:

  • You don’t want to refinance your mortgage because you would rather keep your current interest rate.
  • You need to access a lump sum and want to repay it at a relatively low interest rate.
  • You’ve built a sizable amount of equity in your home.
  • You can afford to pay closing costs and make a second payment every month.

Tip for getting a home equity loan

If you’re thinking about getting a home equity loan as a means of paying off debt, you should first consider other options that don’t put your home at risk. The Consumer Financial Protection Bureau recommends that borrowers speak with a qualified credit counselor. You can find nonprofit credit counseling organizations through the National Foundation for Credit Counseling.

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Home equity line of credit

A home equity line of credit is an open-end credit line that qualified borrowers can borrow against as needed, up to a maximum amount. With a HELOC, you draw on the line of credit over time. The draw period lasts for a fixed period — such as 10 years — and once it’s over, you need to begin repaying your outstanding balance.

Unlike home equity loans, home equity lines of credit typically come with adjustable interest rates.

When to consider a HELOC

You could decide to go with a HELOC if you’re a qualified borrower and:

  • You prefer to keep the interest rate on your existing mortgage.
  • You aren’t sure exactly how much you’ll need to borrow over the next several years.
  • You only want to borrow what you need and no more.

Tip for getting a HELOC

Some lenders will require you to repay the entire amount that you borrowed as soon as the draw period is over. Even if you’re able to pay it back over time, keep in mind that your interest rate may change, which means your monthly payments could fluctuate.

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How To Apply For a Refinance on a Fixed Income

If you think you’re ready to refinance on Social Security retirement benefits, here are some steps you should be prepared to take.

1. Review your finances

Once you’re retired, it’s important to thoroughly review your assets — including any checking, savings, and investment accounts. You should also make sure that your debt-to-income ratio is no higher than 43%. Even if you’re only receiving Social Security retirement benefits, it’s still possible to refinance if you can prove you’ll be able to repay the loan.

2. Understand your financial goals

Before refinancing, you need to get clear on what you’re trying to achieve.

Do you want to lower your mortgage payment to free up your budget each month? Or are you aiming to pay off your mortgage sooner and save money on interest? In either case, a rate-and-term refinance could help with adjusting your mortgage rate, monthly payment, and loan term.

If your goal is to raise enough money for renovations or something else — and you know exactly how much you need — then a cash-out refinance or home equity loan could make sense in that situation. However, if you prefer the flexibility of borrowing money as needed, then you might consider a home equity line of credit instead.

3. Expect a thorough underwriting process

If your finances are less straightforward now compared to the days when you were receiving regular income from work, then your lender may require more time to review your eligibility during mortgage underwriting. According to a December 2021 report from ICE Mortgage Technology, the average amount of time needed to close a refinance is 45 days.

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Mortgage Resources for Older Adults

If you’re looking to learn more about getting a mortgage or refinancing at any age, we’ve got your back. Here are some useful guides:

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The Bottom Line on Mortgages for Seniors

The law protects older adults from lending discrimination, so don’t listen to anyone who tells you that you can’t get a competitive rate on a mortgage or refinance due to your age. Even if you’re retired, lenders could still qualify you for a new loan, as long as you meet the requirements and the lender verifies that you can afford the monthly payments.

Whether you’re looking to downsize, use your home equity, or change the terms of your mortgage, there are loan options available. Just make sure you understand what you’re getting into, and which option best fits your financial situation.