Using Social Security Income To Qualify For Home Loans
This BLOG On Using Social Security Income To Qualify For Home Loans Was UPDATED On June 21, 2017
Social Security Income can be used for mortgage qualification.
- If someone is on social security income, many mortgage lenders will allow the mortgage loan borrower to gross up the monthly social security income by 15%.
- For example, if a mortgage borrower on social security income is receiving a monthly income of $1,000 from Social Security, we can modify the $1,000 gross monthly income by an additional $150 per month or 15% to reflect the borrower is making $1,150.
- This 15% grossing up method is an extreme help in qualifying borrowers on social security.
Downsizing On Home Purchase
A large percentage of Americans decide to downsize to a smaller home when they retire or when their children leave the home and are on their own.
- Many times they choose a smaller home but more expensive home because it might be waterfront or golf course frontage.
- Even though the mortgage loan borrower might have a substantial down payment and a lot of assets, they might run into problems in obtaining a mortgage loan if they retire and qualify with only their social security income.
- There are options and creative ways of obtaining a mortgage for those planning on retiring.
Government Loans Versus Conventional Loans
Government Loans are mortgages that are guaranteed by the federal government. Government Loans are only for one to four unit residential owner occupant mortgages. Home buyers of second homes and investment properties cannot qualify for these loans with government loans.
Here are the three government loan programs in the United States:
- The U.S. Housing And Urban Development (HUD) is the parent of The Federal Housing Administration and is in charge of FHA Loans
- The U.S. Department of Veteran Affairs (VA) and is in charge of VA Loans
- The U.S. Department of Agriculture Rural Development (USDA) is in charge of USDA Loans
The above government agencies are not lenders. Their role and function is to guarantee home loans originated by banks and lenders in the event homeowners default on their loan. The bank or lender that originated and funded the loan will get compensated for their loss by borrowers who defaulted on their government loans.
Conventional Loans are home loans that is not insured nor guaranteed by the government but are mortgages originated and funded by banks and lenders and sold to Fannie Mae and/or Freddie Mac. In order for Fannie Mae and Freddie Mac to purchase conventional loans, the mortgages need to conform to Fannie Mae or Freddie Mac’s Mortgage Guidelines. Home Buyers can purchase second homes and investment properties with Conventional Loans.
Second Home Purchase As Primary Residence
Lets take a case scenario.
- Say John Jones makes $65,000 per year and is currently living in Illinois but wants to retire this year and retire to Florida and buy a home there.
- He currently owns a home in Illinois that is worth $200,000 and is free and clear. He wants a mortgage in the new Florida home because he wants to use the proceeds of the sale of the house as a nest egg towards his retirement.
- John’s social security income will be $1,000 per month when he retires.
- How should John go about getting his new Florida home.
Second Home Purchase
- One way John can go about getting his Florida dream home is to see if he can purchase it while he is still employed full time as long as he can afford it.
- John should seek the advise of a Florida mortgage broker and see if he can purchase his Florida home as a second home with a conventional loan.
- Second homes’s interest rates are almost the same as owner occupied home interest rates.
- Under Fannie Mae Guidelines On Second Homes, second home mortgages require 10% down payment.
- John should consider getting a conventional loan versus a FHA loan because with a conventional loan, he can cancel his private mortgage insurance premium once his loan to value of his home is at 80% whereas with a FHA loan the mortgage insurance will be in effect throughout the term of the loan.
Private Mortgage Insurance On Home Purchase
- If John can put down 20%, he does not need private mortgage insurance.
- With Conventional Loans, any down payment less than 20% requires private mortgage insurance since they are not insured by the government.
- John can get his second home with a 10% down payment.
- A larger down payment could mean a lower interest rate so if he can afford a larger down payment, it would be beneficial for him.
- John can then close on his Florida home.
- He can then retire and sell his house in Illinois.
- Once John gets the proceeds from his sale of his Illinois home, John can pay down his Florida home loan so his Florida home’s loan to value is at 80% to avoid private mortgage insurance.
- There are no pre-payment penalties on government and conventional loans.
Home buyers with social security income can contact Gustan Cho at 800-900-8569 or email us at firstname.lastname@example.org to see if they qualify. We are available 7 days a week, evenings, weekends, and holidays.