A retired couple looks over a Social Security check. Getting a mortgage with only Social Security benefits is possible, but not having regular income from a job or retirement accounts can make it more challenging.
Old age and a fixed income does not preclude you from getting a home loan. You may not qualify for a larger mortgage that requires more earned income, you can still get a home loan with Social Security alone. However, not having regular income from a job or retirement accounts will make securing a mortgage more challenging. Below, we’ll go over what to keep in mind as you apply for a mortgage with only Social Security benefits. Meanwhile, a financial advisor can help you plan for retirement, including finding the best time to claim Social Security.
Can a Senior Get a Mortgage?
The short answer is yes. There is no age limit on getting a mortgage. Thanks to the Equal Credit Opportunity Act, lenders are barred from discriminating against borrowers based on race, religion, nation of origin and age. The federal law also prohibits discrimination in credit transactions when an applicant receives public assistance, including Social Security.
That means if you’re a senior citizen and your only source of income is Social Security benefits, a borrower cannot turn you away simply due to your age or the public assistance that you receive. However, you must keep in mind that lenders will consider your monthly income when deciding whether to approve your mortgage application. A fixed or limited income derived solely from Social Security benefits may not be enough for a lender to extend you a home loan.
How to Get a Mortgage Using Only Social Security Income
A retired couple sign mortgage documents after getting a home loan. Getting a mortgage with only Social Security benefits is possible, but not having regular income from a job or retirement accounts can make it more challenging.
Getting a mortgage when your only income is Social Security benefits is no different than applying for a home loan when you have a job. You’ll need a down payment, proof of income, a qualifying debt-to-income ratio and a viable credit score. However, satisfying these other requirements becomes even more important when your only source of income is Social Security.
Credit score: Most mortgage lenders require a minimum credit score of 620, although some lenders may require an even better credit. And if your only source of income is Social Security, a higher credit score may bolster your application.
Debt-to-income ratio: Mortgage lenders will also review your debt-to-income ratio, the percentage of your gross income needed to cover monthly debt payments (including your mortgage). Lenders typically require debt-to-income ratios of 43% or less, meaning no more than 43% of your gross monthly income can be spent on your mortgage, car payment, credit card bills and any other debts. With Social Security benefits being your only form of income, not carrying any debt (other than your mortgage) will be vital. We’ll show you why in our example below.
Down payment: The size of your down payment that’s required will hinge on the type of loan you’re looking to secure. While you’re able to get a Federal Housing Administration (FHA) loan with as little as 3.5% down, your lender may require you to put significantly more down if your only income comes from Social Security. Using a larger down payment will also reduce the size of your loan and, as a result, lower your debt-to-income ratio.
Proof of income: Lenders typically require income verification as part of a mortgage application. For most applicants this means submitting recent paycheck studs and a W-2. If you’re on Social Security, you’ll need to submit a Social Security verification letter to the lender. You can request a benefit verification letter online by creating an account on the Social Security Administration website.
‘Grossing Up’ Social Security Income for a Mortgage
A retired couple goes over their mortgage documents with their loan officer. Getting a mortgage with only Social Security benefits is possible, but not having income from a job or retirement accounts can make qualifying for a home loan more challenging.
While it will be more difficult to qualify for a mortgage with Social Security benefits as your only source of income, there is good news. Lenders give special consideration to nontaxable income, which includes disability benefits, child support payments and even a portion of Social Security benefits.
Lenders considering a conventional mortgage application, can “gross up” this nontaxable income and treat it as if it’s worth up to 25% more. Although it’s important to note that not all lenders will do this. Some may opt to gross up your income by a smaller percentage.
How much of your Social Security benefits are subject to income tax will depend on your combined annual income and tax filing status. Beneficiaries who file their tax returns as individuals don’t pay any federal income tax on benefits if their combined income is less than $25,000. So if you collect $20,000 per year in Social Security and have no other streams of retirement income, your mortgage lender can gross up your annual income and treat it as if you earn $25,000 per year (for a conventional loan). As a result, you may qualify for a larger mortgage.
Individuals with a combined income between $25,000 and $34,000 may pay federal income tax on up to 50% of their Social Security benefits. If their combined income is more than $34,000, 85% of those benefits will be subject to income tax.
Couples that file joint returns pay income tax on up to 50% of their benefits if their combined income is between $32,000 and $44,000. Up to 85% of benefits are subject to income tax if a couple’s combined income surpasses $44,000.
That means a portion of every beneficiary’s Social Security benefits (between 15% and 100%) are nontaxable and can be grossed up during the mortgage application process.
What Getting a Mortgage May Look Like for You
Let’s say you collect the average monthly Social Security check, which in 2022 is worth $1,658. Since you have no other streams of income, your annual receipts are $19,896. Unfortunately, your lender does not gross up nontaxable income, so your home loan value will be based on your monthly income of $1,658.
Thankfully, you do not have any other debt, have an excellent credit score and have enough cash saved to make a down payment of $50,000.
So what can you afford with only Social Security income? Remember, lenders will cap the size of your home loan so your debt-to-income ratio does not exceed 43%. That means your monthly mortgage payment can be no more than $713 ($1,658 X 0.43). The size of your home loan will ultimately depend on your lender and current interest rates.
As you can see, having only Social Security income will limit the amount of money a lender is willing to loan you. As a result, buying a home under these circumstances may require a hefty down payment.
Bottom Line
Getting a mortgage when your only income is Social Security isn’t impossible, but it may be challenging. Thankfully, federal law protects seniors from being discriminated against based on their age or the public assistance they receive when applying for a mortgage.
If you’re looking to get a mortgage using only your benefits, you’ll need to have a strong credit history, show proof of your Social Security income, have a debt-to-income ratio under 43% and have cash for a down payment. If your lender is willing to gross up your income, you may qualify for an even larger loan.
Tips for Getting a Mortgage
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A financial advisor can help you get your financial house in order before you apply for a home loan. This may include setting a budget, saving for a down payment and analyzing your monthly expenses. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Speaking of setting a budget, SmartAsset’s mortgage calculator can help you estimate how much your monthly payment will be based on the price of the home and the size of the loan you’re getting from a lender.
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Before selecting a lender, be sure to shop around for a low interest rate. SmartAsset’s mortgage comparison tool will help you assess your options on the market and hopefully find a lender that suits your needs.
Photo credit: ©iStock.com/Zinkevych, ©iStock.com/fizkes, ©iStock.com/Panupong Piewkleng
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