Are you too old to apply for a housing debenture? In legal terms, the answer is a resounding “NO.” But in reality, the answer to this question is pretty complex. For instance, a person has searched for a couple of years, but they have finally found their dream house in their dream community. The only problem is that they need a housing debenture to finance the purchase of this house. The buyer is retired, and their 70th birthday is coming.
Can they purchase the house? Should they buy it?
Can older adults qualify for a home debenture? And more importantly, does taking these huge debts after retiring make a lot of sense financially? The answer to the first question will depend on the buyer’s obligations and income. Financial institutions like conventional banks, credit unions, or online lending firms cannot deny a person’s application for a debenture because of their age.
If people can prove that they can afford a monthly amortization and they have a good and stable credit score, lending firms will approve their application. The more complicated question to answer is the second one. Even if a person can qualify for a housing loan in their sixties or even in their seventies, should they take on this financial burden of monthly housing-loan amortizations at this stage in their life? It is a serious question without a straightforward answer. According to experts who usually work with people struggling with financial issues, senior citizens think carefully before applying for a new home loan.
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Managing monthly expenses
Overall, a lot of people do not think that taking on these debts at such an advanced age is an excellent idea. A lot of senior citizens are on fixed incomes. What if something happens and they can no longer pay their monthly home debenture payments? What if property taxes go up and it makes the monthly amortization unaffordable?
Older people should not put themselves in positions in which they might need to worry about making the monthly amortization. That is not to say that it never makes a lot of sense for older people to take on new housing debentures. Like all property owners, they might opt to refi an existing loan to one with lower interest rates (IRs) and, therefore, much lower amortization. It can help senior citizens on fixed incomes minimize their monthly expenses.
Even if borrowers extend their credit life using a refinance plan, their monthly savings might be enough to make these moves financially logical. Then there is the problem with credit card (CC) debts. According to experts, it might make a lot of sense for these individuals to apply for cash-out refi plans that provide them lump sums of money to pay down their CC debts that come with sky-high IRs.
After all, their new home debenture debt will undoubtedly come with much lower IRs. But there are risks with this move. People need to consider that they are taking unsecured CC debts and turning them into secured ones. These are debts that are secured by properties. If individuals cannot make their amortizations, their banks could take their houses. If they understand this and can afford the monthly amortization, this move could make a lot of sense.
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Downsizing with mortgages
Other older individuals might want to downsize from bigger homes to smaller ones that are easier to care for. Depending on when they bought their existing houses, they might not be able to sell these houses for enough to cover mortgages on small residences. In these cases, there is a good chance that they have no choice but to take on new mortgage loans, even if they are in their sixties or seventies.
According to financial experts, some senior citizens, let their emotions cloud their judgment. They love their house too much, and they do not want to sell them. They hang onto these properties even when the best financial thing to do is to sell big houses with high property taxes.
There is a good chance that they have a property with more than three bedrooms, and these things are empty nesters. From a sensible point of view, it makes a lot of sense to downsize and move into smaller houses that are easiest to take care of. It has to be a huge business decision. They need to discuss all aspects of the decision, even things that are difficult and emotional.
Qualifying
If people decide that applying for a new housing debenture – whether to buy a house or a refi to replace their existing home loan – makes a lot of sense for them financially, here is what they need to qualify for. The first thing people need is enough income coming into their bank accounts every month.
Today, lending firms usually want the borrower’s monthly debt – including their new home debenture payment – to equal no more than 43% of their gross monthly income (the income before taxes and insurances are deducted). A lot of individuals rely on their jobs for most of their monthly income.
If they are retired, they cannot do that. However, they can use other sources of monthly income. It can include royalties, Social Security payments, and rental incomes from rental properties they own, capital gains they receive from various investments or pension payments.
They will also need a good credit score. Most lending firms consider a FICO score of 740 or higher to be considered an excellent one. If their score is 640 or lower, it will be pretty hard to qualify for a housing loan with an affordable IR. But if the borrower’s credit score and income are good enough, they should be able to get approval for a mortgage debenture no matter how old they are.
Long-term planning
People will need to determine if taking on mortgage debt at this stage of their lives makes a lot of sense. If they die before they pay off the loan completely, the financial institutions might have to sell their house to generate enough money to pay off their debts. It means that they will not be able to leave their house to their family members or heirs unless they are able and willing to pay the predecessor’s debts themselves.
Individuals might stage that their property does not pass on to their kids in their wills. Again, if they die with a home loan and the money in their estate is not enough to pay it off, there is a good chance that their beneficiaries might not be able to pay these loans and take ownership of the property.
The bank might need to sell it on its own to pay for the debt. If the person is taking on a housing loan after they retire, they need to know that they are not alone. The number of senior citizens in this country that are still paying their mortgages is not shrinking.
According to a study conducted by the Consumer Financial Protection Bureau finding that the percentage of retired property owners aged 65 years old and above that is still paying a mortgage loan rose from 22% to 30%. Another study from the Consumer Financial Protection Bureau shows that from 2001 to 2011, median balances of mortgage loans held by seniors jumped from $43,000 to $80,000.
These studies indicate one thing: The number of senior citizens in the country that needs to deal with monthly amortizations long into their lives is increasing year by year. They will have to decide whether doing this on their own accord makes financial sense for these people. Individuals need to make a clear and thorough analysis of their cash flow.
They need to look at what their tax bracket is, as well as understand what future needs might come their way. Older individuals or retirees cannot just jump into this type of decision because someone will tell them that this thing is an excellent idea – because, in reality, it is not.