Downsizing to a Smaller Home

Qualifying For a Mortgage Downsizing To a Smaller Home

Gustan Cho Associates are mortgage brokers licensed in 48 states

This  guide covers qualifying for a home loan downsizing to a smaller home. It makes no sense in having a large home when the kids leave. Many homeowners who become empty nesters only use a portion of their home. However, homeowners with a large home spend a lot of money on utilities, insurance, maintenance, and property taxes. A large percentage of our borrowers at Gustan Cho Associates are homebuyers downsizing to a smaller home. In this article, we will cover and discuss qualifying and getting approved for a mortgage downsizing to a smaller home .

Reasons For Downsizing To a Smaller Home

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Qualifying and getting approved downsizing to a smaller home is not just for retirees and empty nesters. There are other reasons for downsizing to a smaller home. Homeowners who divorce often downsize to a smaller home. Other reasons for downsizing to a smaller home are illness, job loss, job relocation, and too much maintenance. Larger homes on larger lots require a lot more maintenance. More maintenance means more money. Many homeowners who go through a divorce may not be able to afford a large home. They may consider downsizing to a smaller home or renting. Homeowners who travel a lot may need to downsize to a condo or townhome for security reasons as well as to save on maintenance costs.

Buying Versus Renting When Downsizing To a Smaller Home

When downsizing to a smaller home, you need to consider what is better for you and your family. Qualifying for a mortgage when downsizing to a smaller home is similar to qualifying for any other mortgage, but there are some factors to consider:

  • Buying versus renting
  • Older folks may consider renting to avoid maintenance
  • Renters do not have to worry about mowing the lawn, plowing snow, and basic repairs
  • Benefits in owning your own home are you build equity, have the freedom and can decorate the property without permission by the landlord
  • Pet owners can enjoy having dogs and cats whereas as a renter, they would need permission
  • Landlords have the right not to renew your lease

As a homeowner, nobody can tell you they will not renew your lease.  Lenders will look at your income and employment history to ensure you have the means to make mortgage payments. If you’re retiring or transitioning to a lower-paying job upon downsizing, ensure your income is still sufficient to qualify for the mortgage. 

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Credit Score Guidelines Downsizing To a Smaller Home

Your credit score plays a significant role in mortgage qualification. High credit scores mean better terms and interest rates. Maximizing credit scores before applying for a mortgage is best recommended. Be prepared to provide documentation of your income, assets, debts, and other financial information when applying for a mortgage. Having all the necessary paperwork ready can streamline the process.

Debt-to-Income Ratio (DTI) Mortgage Guidelines Downsiznig to a Smaller Home

Lenders evaluate borrower’s debt-to-income ratio to determine if they can comfortably afford the mortgage payments alongside other debts. If you’re downsizing, your expenses might decrease, improving your DTI and increasing your chances of qualifying for a mortgage.

Down Payment Mortgage Guidelines Downsizing To a Smaller Home

While downsizing may reduce the cost of your new home, you’ll still need a down payment. The amount required varies depending on factors like the lender, loan program, and your creditworthiness. Saving up for a down payment is essential.  If you’ve built up equity in your current home, you may use it for a down payment on the smaller home. This could also lower your loan-to-value (LTV) ratio, making you more attractive to lenders. Pay off any outstanding debts before applying for a mortgage. Lowering your debt can improve your financial profile and increase your chances of qualifying for a mortgage.

Affordability Downsizing to a Smaller Home

Ensure that the mortgage on the smaller home fits comfortably within your budget. Just because you qualify for a certain amount doesn’t mean you should borrow that much. Consider your long-term financial goals and how the mortgage payments will impact your overall financial picture. By considering these factors and working with a reputable lender, you can increase your chances of qualifying for a mortgage when downsizing to a smaller home.

Downsizing Due To Financial ReasonsWhat are the reasons for reducing your home?

If you are considering downsizing to a smaller home due to financial reasons, there are things you should consider.

  • In many instances, a mortgage payment can be equivalent or less than rent
  • Take the tax deductions of mortgage interest expense and potential appreciation of the home, then you will be ahead of the game as a homeowner versus a renter
  • Try to choose a home where the property tax is low

Many homeowners from a high-taxed state such as New York move to lower-tax states such as Tennessee. Do your due diligence before pulling the trigger.

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What Experts Say on Downsizing To a Smaller Home

Decide what type of home you want to buy. Condo? Townhouse? Manufactured home? Single-family home? 2 to 4 unit multi-family home?

Primary Versus Second and Investment Home Mortgage Guidelines

Most homebuyers would want to purchase an owner-occupant home as a primary home. Government loans such as FHA, VA, and USDA are for primary owner-occupant home financing only. Fannie Mae and Freddie Mac allow second home and investment property mortgages. The main reason primary home mortgages is the home loan of choice is because of little to no down payment and the best mortgage rates

Homeowners who plan on downsizing to a smaller home are eligible to qualify for owner-occupant primary home financing. Lenders would want to know why the homeowner is downsizing.

If a homeowner is an empty nester and is selling their current 4,000 square feet home and moving to a 1,500 square feet condominium a block away, they would qualify for a primary residence home loan. However, if the homeowner is moving from a 4,000 square feet home to a 3,500 square feet home, that would not qualify as a primary residence. The square footage needs to be substantial. The deal needs to make sense. Otherwise, the homebuyer would need to go with an investment property loan. Investment home mortgages require 20% down payment and mortgage rates are higher.

Qualifying for a Mortgage When Buying Another Home

Qualifying for a mortgage when buying another home may be a problem if you do not sell your existing home. Most homeowners have mortgages. If you sold your existing home and plan on closing the sale of your new home and purchase of the downsized home on the same day, it will be no problem.

If you are planning on closing on your new home before your existing home sells, then you would need to qualify for both mortgages.

In the past, homebuyers of condominiums could only qualify for HUD approved condos with FHA loans. Recent HUD Condo Guidelines now allow FHA Spot Loans. What this means is condominium buyers can qualify for FHA loans in non-HUD-Approved condo complexes. VA requires VA Approved Condo Complexes. For more information about this article or other mortgage-related topics, please contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at

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