BY PETER MILLER, CTW FEATURES
Question:
My mother and father, who are now 70 and retired, own their home free and clear. They want to refinance the property and then give my sister and I a cash gift, so we have down payment cash to buy our own houses. We love the idea, but can they do this at their age and when a large portion of their income is Social Security?
Answer:
Let’s start with the age question. Simply put, the Equal Credit Opportunity Act prohibits credit discrimination on the basis of several factors, including age. So yes, if financially qualified, a 70-year-old borrower can get a 30-year mortgage.
Now, about Social Security. According to the Social Security Administration, if you retire at the full retirement age in 2022, the maximum benefit is $3,345 per month but not everyone gets so much. According to AARP, “the estimated average Social Security retirement benefit in 2022 is $1,657 a month.” Th ere are various tax rules that impact Social Security income. The government estimates that “about 40% of people who get Social Security have to pay income taxes on their benefits.” That also means about 60% of all recipients do not. Social Security payments are not taxed by most states. At the federal level, according to the Social Security Administration, “some people who get Social Security must pay federal income taxes on their benefits. However, no one pays taxes on more than 85% percent of their Social Security benefits.”
The various tax benefits associated with Social Security payments mean that lenders must look at such income with care. In many cases, they will be able to “gross-up” Social Security payments, meaning they will effectively be treated as a larger sum for loan qualification purposes. Social Security income, combined with other qualifying income, will allow lenders to determine how much financing might be available to your parents.
As an alternative to a mortgage that requires monthly mortgage payments, your parents may want to consider a reverse mortgage. Such financing does not require monthly payments for principal and interest; however, they will still have to pay such costs as property taxes and insurance. Be sure to shop around because up-front costs can be significant, and they will want the lowest available interest rate. When your parents leave the property, sell, or pass away, the loan will have to be repaid. Th is may leave little, if anything, for you and your sister if the property is sold. Alternatively, you might be able to refinance the home with a new mortgage and keep the property.
For details and specifics, your parents should consult with a fee-only financial planner or an elder law attorney. Lenders will need a gift letter to show that repayment of the money is not required.
Email your real estate questions to Mr. Miller at peter@ctwfeatures.com.