Mortgages
Summary
There are many different mortgage products available to borrowers of all ages. This article describes some reasons for getting a new or different mortgage. It then covers the most common mortgages available, from standard 30-year fixed loans to asset depletion mortgages, refinancing, lines of credit, and more.
Why do people get a new or different mortgage?
There are many different mortgage products available to borrowers of all ages. Buying a new home is just one reason people might want to get a mortgage. Some other reasons are:
- Taking advantage of equity in the home. By taking out a loan on an existing home, borrowers can use funds to cover medical or other living expenses, including remodeling or repairs.
- Having income or expenses that change dramatically. Some borrowers may be facing a major expense or a change in income or assets, for better or worse. Major shifts in income or expenses are a good reason to re-evaluate the borrower’s current mortgage and make sure it’s still the best option for their needs.
- Getting a better interest rate. Interest rates on mortgages can change dramatically over the course of a 30-year term, or even over a shorter-term loan. If the person borrowed at a high interest rate but now qualifies for lower interest, refinancing is one way to put money back into their pockets and save on this major expense.
- Downsizing. Many older people choose to move into a smaller home after loved ones have moved out of the home or passed away. Taking on a less expensive mortgage payment is a smart move for many people. If the person has built up enough equity in the home, they may be able to fully pay for a new, smaller, home, with the money from the sale of the first home, and still have money left over.
What is equity?
Put simply, equity is the difference between the value of a home and the amount that is still owed on the mortgage. Over the years, as home prices increase, this means that many older people have built up substantial equity in the homes they own, especially if the mortgage is fully or nearly paid off.
How are mortgages approved?
Mortgage lending is a complex affair, driven by fluctuations in home construction, the economy, interest rates, and more. The federal government controls basic short- and long-term interest rates, but approval and interest rates for individual borrowers is up to the lender. At its most basic, the mortgage amount a borrower qualifies for comes down to their income and their credit rating, along with their debt to income ratio. The higher the income and credit rating, and the lower the debt, the more money a borrower is likely to qualify for when applying for a home loan or mortgage.
Can lenders discriminate based on age?
Many older borrowers worry that they will not be approved for a mortgage, especially not for a 30-year mortgage. But the Equal Credit Opportunity Act forbids discrimination in lending or extending credit on the basis of age, race, color, religion, gender, or marital status.1
What is a conventional mortgage?
A conventional mortgage or loan is any type of home loan that is not provided by the federal government, but is offered instead by a bank, credit union, mortgage company, or other financial institution. Most conventional mortgages are on a 30-year term of monthly payments and a fixed interest rate, but some lenders also offer shorter terms, like five- or ten- or 1-year mortgages.
Applying for a mortgage requires considerable time and documentation. Potential borrowers will need to provide proof of income, including two years or more of federal tax statements and W2 statements, as well as bank statements and investment account statements. The lender will conduct a full credit inquiry and use these factors to determine the amount of mortgage the applicant qualifies for, as well as the interest rate on the loan. In general, most borrowers will need a credit score of at least 620 to qualify for a conventional mortgage.2
What is a jumbo loan?
A jumbo loan is a loan for an amount that exceeds the maximum value approved by the Federal Housing Finance Agency. Jumbo loans are usually taken out in areas where real estate prices are extremely high or competitive, where homes are in demand, or for luxury homes. Since they are riskier for the lender because of the high amount and because they are not backed by the federal government, the credit requirements for jumbo loans are usually much stricter than for conventional loans, and a higher down payment is often required.
What is an FHA loan?
An FHA loan is a loan backed by the Federal Housing Administration. FHA loans typically require lower down payments, and are offered to those with lower credit scores than conventional mortgages. The loans are available to first-time home buyers, but they are also available to certain other qualifying borrowers whose credit history disqualifies them from conventional loans.
To receive an FHA mortgage loan, there are a few additional steps required, above and beyond the credit inquiry and proof of income required for conventional mortgages. An FHA inspector must appraise the property, and the property must meet minimum property standards defined by the Department of Housing and Urban Development.3 The home must be the borrower’s primary residence, and they must occupy it within 60 days of closing on the mortgage.
FHA loans also include a required Mortgage Insurance Premium: an amount of money that is added to the amount of the mortgage to protect the lender in case the borrower defaults on the loan. The premium is divided in two parts: first, as an up-front premium of 1.75% of the base loan, and then as an annual premium, which generally falls between .5 and 1% of the base loan.
What is a VA loan?
The Department of Veterans Affairs, as one of its benefits to veterans of American armed services, offers special rates and terms for service members, veterans, and surviving spouses purchasing or refinancing a home. These loans are backed by the VA and allow borrowers to purchase a home with no down payment—although some banks or lenders may require a down payment. VA loans also have competitive interest rates and do not require mortgage insurance. In addition, the VA provides home owning service members, veterans, and surviving spouses with help refinancing or taking out a home equity loan.
What is the USDA rural housing service loan?
In qualifying rural areas, the U.S. Department of Agriculture offers assistance in purchasing a home for those who demonstrate economic need and are looking to purchase a home within a region that qualifies for the program as outlined by the USDA.4 The USDA offers direct loans to borrowers. It also backs loans for borrowers with private mortgage lenders. The USDA, under the Rural Housing Repair Loans and Grants Program also offers home equity loans for borrowers to make repairs on their homes. Borrowers over 62 may qualify for grants that pay for improvements to remove health and safety hazards.
What is refinancing?
Many people choose to refinance their mortgage at some point over the course of the loan. As interest rates change, it may be a good idea to take advantage of lower interest rates than the ones initially offered. Some borrowers might want to refinance their mortgage from an adjustable rate mortgage (in which the rate changes over time) to a fixed-rate mortgage (in which the rate stays the same for the duration of the mortgage) to ensure that each payment is the same amount over the course of the loan. Alternatively, they might want to switch from a fixed-rate to an adjustable rate mortgage if interest rates are high at the time of purchase, or if they plan to sell the home within five years.
What is a home equity line of credit?
Also known as a HELOC, the home equity line of credit is one of the most common mortgages after a first mortgage. HELOCs allow homeowners to take out a line of credit based on the amount of equity they have in their home. Working a bit like a credit card, the HELOC’s interest rate often varies over time and requires only interest payments for a set period of time, typically around ten years. After that, the borrower has a certain amount of time to pay back the balance. If they are unable to pay back the loan, the home could be at risk for foreclosure: when a borrower fails to make payments and the bank or mortgage company takes possession of the home. For this reason, taking out a line of credit on a home should only be undertaken if the borrower is certain that they will be able to repay it in time. Many homeowners use HELOCs to make improvements to the home that will increase its value.
What is a home equity loan?
Similar to a HELOC, home equity loans allow borrowers to take out a loan based on the amount of equity they already have in the home. Unlike a HELOC, though, a regular home equity loan gives the borrower a lump sum of money immediately. After that, the borrower makes fixed monthly payments for the length of the term, with a fixed interest rate. Just as with a HELOC, if the borrower fails to make the required payments, they risk the bank repossessing the home in a foreclosure.
What are asset depletion mortgages?
For many older people, the largest hurdle to getting a new mortgage is the ability to demonstrate income. Retirement brings with it a fixed or limited income, so conventional loans that want proof of income may not approve these borrowers. If the borrower has substantial cash assets, though, they can use these rather than income to qualify for a loan. Essentially, the cash assets are counted as collateral.
When calculating how much funding the borrower will qualify for, mortgage lenders consider money market, savings, and checking accounts, along with some retirement and pension funds. Once they have come up with a valuation of the assets, the amount is divided by 360 —the usual length of a standard mortgage in months—and that amount is used as the monthly “income” amount for the borrower.
Asset depletion mortgages are used most often by retirees or those who have no employment history, but have a considerable amount of money on hand. Asset depletion mortgages often require a down payment of 25% or more, as well as a credit score from 680 to 700 or higher.
What is a reverse mortgage?
A home equity conversion mortgage, more commonly known as a reverse mortgage, is a type of refinancing that can be advantageous for older adults who have equity in their home and want to use some of that equity to pay for expenses.
In a reverse mortgage, borrowers over the age of 62 receive a monthly or lump sum payment based on the equity in the home. In exchange, after the borrower no longer lives in the home, the ownership of the home goes to the lender. Interest and fees are added to the loan balance each month, so the amount of the loan goes up over time, as opposed to down.
Reverse mortgages are provided by banks, credit unions, and other lenders. Although a reverse mortgage might be advantageous in the right circumstances, the federal government does warn against common reverse mortgage scams targeting older adults. Borrowers and their caregivers should check with the Department of Housing and Urban Development’s list of approved lenders and proceed cautiously, since many reverse mortgages are not insured by the U.S. government.5
Related information
Dealing with financial challenges
Living arrangements
Moving
Paying for long-term care
Senior discounts
End notes
1 Justice.gov. The Equal Credit Opportunity Act.
2 Rocket Mortgage. How to Buy a House with Bad Credit.
3 HUD.gov. Minimum Property Standards.
4 United States Department of Agriculture. Eligibility.
5 HUD.gov. HUD FHA Reverse Mortgages for Seniors.
