Can You Get a Second Mortgage If Your Only Income Is Social Security?
Budgeting can be difficult when inflation wears away at the purchasing power of your money. Getting a getting a second mortgage on your home can ease the strain by providing you with extra cash. But what happens if your only source of income is monthly Social Security payments? Are you eligible for a second mortgage loan?
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The short answer is yes, it’s possible. However, there are caveats and eligibility requirements to take note of. Here’s what you should know about qualifying for a second mortgage when your only income is Social Security.
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Do Mortgage Lenders Consider Social Security a Source of Income?
In order to qualify for a second mortgage, sometimes referred to as a home equity loan, you’ll need to provide your lender with proof of consistent income. Social Security income qualifies, but with the average retirement benefit amounting to just $1,763.13 per month as of November, it’s not always enough.
“Obtaining a second mortgage solely on Social Security income is challenging, but not impossible. If the borrowers can qualify for the additional debt, within the program guidelines, this can be accomplished,” said Shawn Miller, branch manager of a VanDyk Mortgage office in Florida.
Miller added that there could be some advantages to using Social Security as a source of income. “In some cases, Social Security income may not be taxable, so a lender can “gross up” this income by 25%, which may help the borrower qualify.”
Will My Second Mortgage Loan Be Approved on a Fixed Income?
As long as your fixed income is steady and predictable, it counts as income for your loan application. However, loan approval also depends on whether or not you meet the lender’s other requirements.
Additional Factors Affecting Loan Eligibility
While lenders do recognize Social Security and other fixed income as sources of income, they have credit and other other requirements you must meet.
Assuming your credit score is satisfactory for a loan approval, the next thing the lender will consider is whether you can repay the loan. The lender’s underwriters do that by looking at both your income and your debt. You can be approved for a second mortgage if your debt-to-income ratio falls within the lender’s thresholds.
Can Higher Interest Rates Affect My Second Mortgage Approval Odds?
Higher interest rates affect your odds for approval because they make loans more expensive and result in higher payments.
“Second mortgages are seen as more risky than first mortgages, so they often come at a higher cost, whether that be through fees or interest rates,” said Sebastian Jania, director of Ontario Property Buyers, a Canadian real estate company that helps distressed homeowners sell their homes.
A more expensive loan means the math may not work for the lender. Suppose your income from Social Security won’t cover higher loan payments, or the payments would leave you with very little disposable income. In this case, the lender will likely decline your loan application for a second mortgage.
Alternatives to Second Mortgages
You may have other borrowing options if you don’t meet lender eligibility guidelines for a second mortgage on just your Social Security. Here are a few to consider.
Apply With a Co-Borrower
Adding another person to your loan could help you with the income requirement if your Social Security income falls short. Your co-borrower must also meet the guidelines for income, credit score and DTI.
Unsecured Loans or Credit Cards
You can start with some unsecured options like a personal loan or a credit card. Although interest rates on these products are often much higher than rates on second mortgages, they could be an option in an pinch.
Secured Loans or Credit Cards
Some banks and credit unions allow you to borrow against your deposit accounts — as much as 100% of your balance. Because your cash secures the loan, you may get a slightly better interest rate with these products.
Reverse Mortgage
For seniors who qualify, a reverse mortgage could be a great alternative to a standard second mortgage. This loan allows homeowners age 62 or older to convert part of the equity in their home into cash.
Borrowers can receive their loan proceeds as a lump sum payment, monthly payments or a line of credit. This loan does not require repayment until the borrower dies or moves out of the home for 12 months or more, at which time the loan is due in full.
Bottom line
While getting a second mortgage solely on Social Security income may be possible, current market conditions could make it difficult to get approved.
The good news is that plenty of loan alternatives could help you make up your cash shortfall. Just make sure you do your research and understand the terms and conditions of any loan before moving forward.
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This article originally appeared on GOBankingRates.com: Can You Get a Second Mortgage If Your Only Income Is Social Security?
