Tuesday, July 5, 2011

Can a Retiree Get a Mortgage

By JUNE FLETCHER

Q. I want to buy a retirement home in North Carolina for $263,000. I am selling my home in New Jersey, where I have lived for many years. Although I could pay all cash for the home I'm buying, I'd prefer to take advantage of current low interest rates and not to tie up so much of my money in real estate. The problem is, I'm 69. Would anyone give me a mortgage at my age? And if they did, would I be foolish to take it?

--Little Silver, N.J.

A. As long as you pass a lender's scrutiny in terms of income, debt-to-income, credit and all the other factors any loan applicant must meet, you should be able to get a mortgage.

In fact, any lender who refused you just because of your age would be guilty of violating the federal government's Equal Credit Opportunity Act. The act makes it illegal to discriminate against someone because of age, among other factors, provided that the applicant has the capacity to enter into a contract.

You also are eligible for any type of loan available, including conventional, Federal Housing Administration and Veterans Affairs, if you meet the program guidelines. Some of these loans require low or no down payments and no private mortgage insurance, which would maximize your available cash.

If you should die before the mortgage is paid off, the unpaid balance will become a lien that is tied to the property. Your heirs will have to either make the payments, sell the home to pay off the mortgage and any other liens, or refinance the loan.

Because you are older than 62 and have presumably amassed considerable equity in your current home, you also have another option, a reverse mortgage. The most popular of these loans is FHA's Home Equity Conversion Mortgage, or HECM. This program allows you to convert the equity in your home into cash. You access the money in a fixed monthly amount, a line of credit, or both. You can use the cash for whatever you want.

Thanks to the Housing and Economic Recovery Act of 2008, you may be able to purchase a new home and get a reverse mortgage in a single transaction, which will avoid the need for a second closing. Provided that you and the property you want to purchase qualify for the program, you won't have to pass any income or credit checks. And you will be able to roll closing costs into the mortgage.

There are some caveats. Among them: You will have to meet with a HECM counselor, who will talk about eligibility requirements and alternatives to the mortgage. You will have to pay cash for the difference between the total proceeds that you receive from the HECM and the sales price. You must own your current property outright or have a small mortgage balance. You can't be in arrears on any federal debt, and the home you buy has to be a primary home and a one-to-four unit property that meets FHA's minimum property requirements for health and safety.

If you are building a new home, construction has to be completed and you will need a certificate of occupancy. Also on the downside: Reverse mortgages can be expensive—overall, they tend to be more costly than traditional loans—and they will reduce the amount of equity you have in your home. Moreover, some consumer advocates are wary of them, and some banks have stopped making them.

I don't know enough about your financial situation to recommend what the best course of action is for you. But I can say that given the current state of the housing market, it will probably be years before you will see much appreciation on your new home. So whatever choice you make, I think you are right to free up at least some cash, and not sink it all in real estate.

Write to June Fletcher at fletcher.june@gmail.com.

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