In fact, with traditional mortgages, your Social Security income will be grossed up 15%. This grossed up Social Security income will show you make more money than you do. This will help you qualify for a larger mortgage.
But there is a much better question you should be asking…
Should someone living on Social Security
get a 30 year mortgage or other types of traditional home loans?
If you are 62 or older, a traditional mortgage may not be the best option especially if you are relying on Social Security for most or all of your income. The reason is fairly simple, you are introducing debt and monthly payments to a fixed income.
Generally, a much better mortgage option when you are relying on Social Security for income is a reverse mortgage. But, there are always reasons and scenarios as to why a traditional mortgage may be a better option than a reverse mortgage.
Let’s take a look at some different scenarios and see where each mortgage fits in depending on whether you are considering a mortgage to purchase a new home or refinance your current home.
Living on Social Security and Buying a Home
Scenario 1: You want to buy a home and have a small or no down payment.
In this scenario a traditional mortgage is your only option. You may want to look at a USDA, VA, or FHA mortgage if you have a small or no down payment.
Scenario 2: You have a large down payment and/or could almost pay cash for the home you want.
Both a traditional mortgage and reverse mortgage would work.
Let’s take a look at a traditional 30 year mortgage first and the issues that come with this type of home loan during retirement, especially when Social Security is the bulk of your income.
1. You have a monthly payment – With a 30 year fixed mortgage you are introducing a monthly payment. You may be thinking, well, it’s not really a big deal, we have plenty of income and it’s not a financial burden.
What most people do not consider, including the loan officer helping you with you loan, is this…
2. What happens when you or your spouse passes away? – When a spouse passes away Social Security income and potentially other sources of income will be lost. Will that mortgage payment become a burden? Will it cause you to draw more heavily from retirement accounts to make the payment? Will the remaining spouse be required to sell the home?
When qualifying for a 30 year fixed mortgage on Social Security, the only requirement for your income is that there is a likelihood of the income continuing for another 3 years. The loan officer nor the underwriter have to take into consideration whether or not you could make the mortgage payment if either spouse were to pass away and income was lost.
3. You are tying up liquid cash into an illiquid asset – For most retirees living on a fixed income, the idea of the lowest mortgage payment makes sense. Put as much money down as possible to have a small, affordable mortgage payment.
The problem here is that all of that money you put down is hard to get back.
The only way you can get access to all that cash you used for the down payment is to either sell the home or borrow it back. So, what do most people do when they need money? They either do a cash out refinance, get a home equity loan, or get a home equity line of credit.
The problem with this option is that you are now introducing yet another mortgage payment to your monthly expenses. This could compound the issues stated above.
Why using a reverse mortgage to purchase a home when you are living on Social Security can make more sense.
1. No monthly mortgage payments are required – Even though no mortgage payments are required you still have to pay property taxes and insurance just as you would with a traditional mortgage.
Here’s the kicker, you can make mortgage payments on a reverse mortgage if you want. You can pay as much or as little as you want, when ever you want. In other words, the reverse mortgage gives you the financial flexibility that a regular loan does not.
What’s even crazier is that if you do make payments, and assuming you go with the adjustable rate option. Every payment you make not only pays down the loan balance, but increases your line of credit. That’s right, every payment you make goes into a line of credit. In other words, you can literally get access to all of the mortgage payments you made on the loan.
Even crazier is the fact that any funds in the line of credit actually grow. Think of it like having a savings account where every singe one of your mortgage payments goes. And just like a savings account, the available funds are growing based on the current interest rate plus .5%.
2. It’s a way to protect your spouse financially – Because monthly mortgage payments are optional, when you or your spouse pass away, neither one of you will be strapped with a monthly mortgage payment that may be difficult to make.
When either of you passes away you can just stop making those monthly payments. However, this is even better because if you had been making payments, all those payments have been saved in the line of credit which you or your spouse could use to supplement their income when the other is gone.
3. Retain more cash with a reverse mortgage – As they say, cash is king. And if you are living on Social Security and don’t have a ton of money in savings or retirement accounts, using a reverse mortgage to purchase a home could be a smart move.
For example – Let’s say you sold your home and netted $300,000. The new home you are buying is $400,000. Instead of putting the entire $300,000 down, you may only need to put $250,000 down with a reverse mortgage, depending on current interest rates and age of the youngest borrower. This would keep $50,000 of cash in your pocket. If you don’t have savings, this could put you in a much better financial position than tying it all up in the home you are buying.
Think of it this way – Would you be more comfortable having $50,000 of equity in your home or $50,000 of cash in your savings account? Personally I would much rather have access to the cash.
The reverse mortgage is a massive win for those needing a mortgage and living on Social Security.
- With no mortgage payment you have more money to live on during the month. You are still required to pay your property taxes and homeowners insurance.
- If you don’t need as much money for the down payment, you will have liquid cash to help through the rest of your retirement.
- If you want, you can make a payment and if you do make payments, you have access to every payment you made (depending on your mortgage option)
- When you or your spouse passes away and Social Security income is lost, the mortgage payment will not be a financial burden to the remaining spouse.
In other words, a reverse mortgage can put you in a much more financially strong and flexible financial situation compared to a traditional mortgage when buying a home. This is very important especially if you are living on Social Security as the main source of income.
Getting a mortgage to refinance
your home on Social Security
Refinancing your home when Social Security is your main source of income brings with it all of the same problems as above.
You are introducing a mortgage payment; the payment may be unsustainable when a spouse is lost and household income gets reduced; and it could strain retirement accounts since you may need more funds to cover the new mortgage payments.
However, there are definitely some reasons when
a traditional mortgage will make more sense
when refinancing over a reverse mortgage.
1. It’s not your forever home – If you are planning on selling within the next few years, a conventional home loan could make much more sense.
The biggest reason for this is the difference in refinancing fees between a conventional mortgage and a reverse mortgage. The fees on a conventional mortgage could be about 1/3 of what they are with a reverse mortgage, depending on the type of loan you get.
If you are planning on selling, it makes more sense to pay the lower fees.
2. It’s critical to a household member to be able to keep the home and loan in place – With a reverse mortgage, once the last spouse / borrower passes away the loan becomes due. This could put a household member in a financial pickle as they may not be able to qualify or get a mortgage on their own.
As an example – Let’s say you have a disabled son living with you. We’ll make the assumption they would be unable to qualify for a new mortgage, but they could afford the new mortgage payment, then a conventional loan would make more sense.
Now let’s look at the reverse mortgage as an
option if you need to get cash out of your home.
1. Flexible monthly mortgage payments – As you already read above, a reverse mortgage comes with optional monthly mortgage payments. Even though there are no monthly mortgage payments you still have to pay property taxes and homeowners insurance.
Because there are no payments this can give you a tremendous amount of financial flexibility. If you have a more expenses than normal during the month you can skip a payment. If you only have enough to pay a portion of a payment you can do that too. This feature is critically important for anyone relying on Social Security income.
2. Save your monthly payments for future use – If you make payments and you have chosen to use the reverse mortgage line of credit option. Dollar for dollar every payment you make not only pays your loan balance down but also increases the funds available in your line of credit.
This feature is such a critical part of this loan, especially for those living on a fixed income with little to no other liquid assets. Having those monthly payments available for future use can help keep you from using credit cards or other loans when you need money.
3. Financial protection for you or your spouse – The biggest risk in retirement, especially for those living on fixed incomes is debt. Debt loads may not be a big issue when both spouses are bringing in household income. But when a spouse is lost along with their income, debt loads can become unbearable.
Because the monthly payments are optional, when a spouse is lost along with their income, the remaining spouse will not get crushed by a mortgage payment.
This was a pretty long article to answer the fairly simple question of “Can someone on Social Security get a mortgage?” that can be answered with a simple yes. But there is a whole lot more to consider about mortgages when are retired and living on a fixed Social Security income.
