Written by Jim Vogel:
There are many great reasons a senior would want to move from their long-term home. Maybe they want to downsize, as the upkeep on their family home is becoming too much of a burden. Maybe they want to move closer to family. Maybe they just want a change of scenery. Whatever the reason, many seniors will look to secure a traditional home loan for the new purchase. Here are some things to think about before you do.
Are you even qualified right now?
It may have been a very long time since you bought a new house. You may have not had to worry about how you look to a lender in decades. So, as you currently sit, are you a qualified applicant? How easy will it be for you to secure a new home loan?
Most lenders want to see some form of steady income stream in order to approve a new loan. As a senior living on a fixed income, this may prove tricky. Do note that it is possible to qualify though monthly social security or pension payments, retirement savings, and other cash streams like investments or rental properties. You don’t necessarily have to have a “job” to qualify.
If you have a lot of debt, like credit cards, or a sub-par credit score, however, it could be an issue.
“Mortgage lenders require that your total monthly debt … be no more than 36 percent of your gross monthly income. This is your debt-to-income ratio. If your ratio is too high, consider paying down high interest credit cards to get below the required limits,” notes LendingTree.com
Will you be able to keep up with monthly payments?
“One risk is that seniors living on a fixed income might not be able to make monthly payments, even if they can meet the lender's guidelines … Add inflation or an adjustable rate to the equation, and an income squeeze becomes an even greater risk. Rising property taxes, living costs or interest rates can make a mortgage quite uncomfortable for seniors who have fixed incomes or who want to protect their assets for their heirs,” says Bankrate.com.
Even if you’re able to secure a home loan from a lender, you have to ask yourself: should I? It all depends on your current income and assets, and how stable you see them being for what amount of time. Are you married? Will the sudden loss of your spouse, God forbid, put an extra strain on you financially? Do you receive social security, pension, 401K, or other retirement payments? What kind of investments are you involved in? Are they liquid?
When you get past retirement age, income usually decreases over time. Interest rates may go up after a while, leaving you in a pickle.
Do you really want to take on a multi-year (15 or 20) mortgage?
Consider your age and financial situation when debating this question. If you think that a long-term mortgage may not be right for you, consider opting for a shorter-term option if you can swing a larger down payment and handle the higher monthly mortgage payments.
Other factors to consider are whether or not you are selling your home (and can therefore use its proceeds) or are wanting to hang on to your current home (and pass it along through your family via quitclaim deed or some other form of property transfer) or use the home to generate rental income.
Other options like a reverse mortgage purchase, or using your savings/retirement funds to foot the bill may turn out to be a better option for you. If you are having trepidations, it’s always smart to enlist the help of a financial advisor.
Written by Jim Vogel, an activist who highlights ways in which we can give seniors support.
Visit ElderAction.org for more information and resources.