Empty nesters, retirees, older borrowers, seniors. Whatever you call them, the older generations are an important demographic for you to consider. So how do you close mortgages for retirees?
Unsurprisingly, retirees face special financial and lifestyle circumstances that may change their home buying decisions. Whether they recently retired, had kids move out, or even took on a child’s student loan debt, they may be rethinking their financial plan.
Getting a Mortgage as a Retiree
One major myth is that mortgages for retirees are difficult to earn, which simply isn’t true. The Equal Credit Opportunity Act means that lenders cannot discriminate based upon age.
Therefore, it’s up to the borrower to determine exactly how much they will be able to afford to repay. For example, perhaps a 60-year-old who works full-time is approved for a mortgage. If they then retire the very next year, will they be able to pay their monthly mortgage bill? This decision needs to be made carefully, and with consideration of potential expenses down the road.
As a loan officer, you can encourage your older borrowers to meet with a financial planner to plan ahead for their retirement. This will help them make the most responsible decisions they can. Plus, it will build trust between you and your clients.
One popular option for older borrowers is to downsize. Especially for parents whose children moved out recently, the larger home that they raised their family in may no longer be the best fit. Although downsizing can be a great decision, it’s important that they consider the state of their current mortgage. Many retirees have paid off their mortgage or are very close to doing so. Because of this, moving to a smaller house may actually end up costing them more money per month!
Helping Through the Downsizing Process
If your customers do decide to downsize, there are some ways you can help. By recommending a trusted real estate agent, you can help support their search for a new, smaller home. You can also help make the process as smooth as possible by offering them helpful tips and tricks about moving.
One huge issue for retirees moving to a smaller home is that they have accumulated many years of belongings in their current home. It’s recommended that they downsize their belongings too–after all, their new, 1,000 square foot condo will have a lot less storage than their 2,500 square foot home!
You could also recommend a trusted moving company to your customers, in order to make the stressful moving process as easy as possible. Downsize mortgages for retirees present loan officers a great chance to truly serve and support their clients.
Another popular option for slightly older borrowers is to take out a reverse mortgage.
What is a reverse mortgage?
A reverse mortgage, also called a Home Equity Conversion Mortgage (HECM), allows seniors to quickly access money tied up in their home. They can receive home equity loan payments from their bank, with amounts paid depending on how much equity they have in their home. However, once the borrower dies, or no longer lives in their home, the loan, plus all interest, must be paid off.
What are the requirements for getting a reverse mortgage?
There are a number of requirements for someone interested in getting a reverse mortgage. First, the homeowner must be 62 or older, and must either own their home outright, or have a low balance remaining on their mortgage. Their home must also be their main residence, and they need to continue to pay property taxes and all other home related expenses.
What are the benefits of reverse mortgages for older borrowers?
By taking out a reverse mortgage, those on a fixed or limited income can access a consistent source of income. For those who aren’t ready to move out, but need additional money to continue to live in their home, reverse mortgages can fill a necessary gap.
What are the downsides of a reverse mortgage?
However, reverse mortgages do have downsides. Most importantly, older borrowers need to consider that interest does accrue over time, so when the mortgage is due, it can be difficult to pay off.
Next, in order to have a reverse mortgage, the borrower must live in the home for the life of the loan. If they end up needing to move out, the loan will be due. If they cannot pay the loan back, the home will be sold immediately. This could negatively affect anyone else living in the home. In the same way, when the borrower dies, their estate is responsible for paying off the loan.
A more traditional option is for an older borrower to refinance their mortgage. By refinancing, retirees can lower their monthly mortgage payment through extending the length of their loan. Or, they could refinance into a shorter loan, taking on more expensive payments, but paying off their home more quickly.
Refinancing can be a great option for those whose housing costs are too high. The U.S. Bureau of Labor Statistics says that the average American between 65 and 74 years old spends about 32% of their income on housing every year. By refinancing, they can spend less of their monthly income on their home, which can help their retirement funds last longer.
Questions to Ask Your Borrowers Before They Refinance
There are many things that borrowers should consider before they refinance their mortgage, such as:
- How long do you have left on your current mortgage?
- How long do you intend to continue to live in your home?
- Who will pay off the remaining balance of your mortgage once you die?
- How much will the refinance cost you with closing fees?
- What is your current interest rate and what would your interest rate be with a refinanced loan?
By asking all of these questions, you will be helping your retired borrowers properly plan for their financial futures.
In some circumstances, retired borrowers may not want to downsize, but instead, move into their “dream home.” In those cases, they may need a jumbo loan, which is any mortgage that exceeds the limits from the Federal Housing Agency (FHA). The maximums for a mortgage varies based on what area of the country a home is in. For the majority of the country, the limit is $484,350, but in other parts of the country, it is $726,525.
If you have a customer who is interested in buying an expensive home, you can help them understand the unique circumstances needed to earn a jumbo loan. They will need excellent credit (at least 700 or more), as well as a very low debt-to-income (DTI) ratio. They will also need to prove that they have the assets for their mortgage payments.
Borrowers Who Are Carrying Student Debt
Student loan debt for those between the ages of 60 and 69, has increased 71.5% in the past five years. Why? Well, between older Americans returning to school, and parents taking on the burden of their children’s student loan debt, more and more retirees are saddled with student loan debt.
This can be a huge problem for many seniors, who may not have planned their retirement finances to include student loan payments. There are many ways to assist borrowers who have large amounts of student loan debt. We detail some of them in this post.
Closing mortgages for retirees requires that loan officers focus on providing an amazing customer service experience at every step of the way. By focusing on educating your customers and walking them through all of their options, you’ll be proving your value as a truly top of the line loan officer.