Q: There are thousands of seniors like us who are “stuck” in their homes because they do not “qualify” for a mortgage, let alone a refinance of their existing mortgage. All our funds are tied up in our houses or condos and we’re barely surviving on our monthly Social Security checks.
If seniors have a mortgage and wish to move to a smaller home, they can’t because no one will give them a new mortgage, even if they have a great credit history and credit score, have a sterling bill payment record for 25 or more years, and have adequate savings.
We are stuck because our income-to-expense ratio is considered to be “too high” to qualify for a mortgage. We want to leave our home and move elsewhere, but no one seems to have a solution. Do you have any ideas?
A: You raise several important issues in your email: senior citizens who have equity in their homes, but can’t refinance their existing mortgages or get a new conventional mortgage and seniors who want to move from their current residences, but won’t qualify for the mortgage they’ll need to purchase a new home. Both of these are a version of the adage “house rich, cash poor.”
If you have a loan today and you’re able to make your payments, you might not understand why a lender would turn you down for a new mortgage (at perhaps a lower interest rate than your current mortgage) or home equity loan. Lenders take a risk every time they make a loan. They are required by the government to loan money based on your ability to repay. And the “ability to repay” is set according to specific formulas, depending on the type of loan you have.
When you live on Social Security, it’s guaranteed income, which is helpful. Because lenders like to know your income stream will continue. But, if that’s all the income you have, it’s tough to qualify for a mortgage of any reasonable size, even at today’s extremely low interest rates.
So, what can you do? It seems as if you want to move from your current home. You might try applying for a loan with a credit union or community bank, which might keep your loan in its portfolio and would then set its own parameters for approving your application. You might also apply for an FHA loan, which would have higher debt-to-income thresholds.
If you can’t qualify for a mortgage, your options are to buy a home for whatever amount of cash you will receive after you sell your current home, or rent.
There is nothing wrong with going from being a homeowner to becoming a renter. It’s typically less work for you and you’ll have flexibility in case you need to move quickly to an assisted living facility or nursing home later in your golden years. But we understand that if you’ve been a homeowner, and enjoy that cachet and control, you may not want to rent. Fair enough.
Buying a new place with cash seems like a good goal. Perhaps you can trade your larger residence for a smaller condominium or even a small ranch home.
The only other option we can think of is for you to move in with a child, sibling, cousin or friend, or find another friend/couple that wants to share the expenses of a home with you — and, perhaps share ownership of the new property. More “group homes” for seniors are being built, and you may want to consider moving to a community that has you live in a tiny home but share some common elements, like a communal kitchen.
If you decide to stay in your home but want to cash out some of your equity, you might look to do a home equity line of credit. You won’t get much, but you may be able to access $10,000 to $30,000, which might be enough to fix up your home, pay for a medical procedure or take a trip.
If you need more cash, and you and/or your spouse are at least 62 years of age, you might consider getting a reverse mortgage. In a reverse mortgage, a lender will refinance the old mortgage and may also give the homeowner access to a certain amount of their equity as a cash payment. This could come in a lump sum or as a monthly stipend, or just sit in an account like a home equity line of credit waiting to be drawn down.
The amount of cash you’d receive is based on the age of the borrower (and spouse, if there is one), current interest rates, the value of the home, and a few other factors. If you have a mortgage, your goal should be to get that paid off with the reverse mortgage funds, which will free up monthly cash flow.
What most consumers like best about a reverse mortgage is there is no requirement to pay anything on the loan until the home is sold. That means, you could live there another 20 years without making a mortgage payment. Once the homeowners die or sell the home, the loan is repaid.
Of course, caveat emptor (buyer beware): Although there is no monthly mortgage payment with a reverse mortgage, the homeowner must still pay their homeowners insurance premiums and real estate taxes or risk losing the property. Also, the interest rate will be higher than for a conventional mortgage. And there are some significant fees that get built into the cost of the loan. Finally, there may not be much, if anything, left for your heirs after your death. (Not necessarily a problem for you, but you might want to tell them so they aren’t surprised.)
While no solution is perfect, a reverse mortgage might allow a senior to stay in their home during their golden years. Just be sure to investigate this option thoroughly. In the right situation, a reverse mortgage may satisfy that homeowner’s ability to get cash out of the home or just eliminate the monthly mortgage payment. We also want to make sure that any person that takes out a reverse mortgage understands all of the rules governing reverse mortgages and the things you can and can’t do while you own the home.
You can get more information on reverse mortgages at www.consumerfinance.gov. Let us know whether you decide to stay or sell and move.
If our readers would like to share their experiences with reverse mortgages, we’ll publish their stories in an upcoming column. Send your comments to firstname.lastname@example.org.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)