When one pictures a typical mortgage applicant, the image of a newlywed couple buying their first home or parents seeking a larger house for their growing family often comes to mind. However, it’s important to recognize that older Americans also frequently utilize home loans. They may use them to finance the purchase of their new retirement home or opt for cash-out refinances to access the equity that has accumulated over time. Federal data shows that home equity constituted around 47% of the net worth of homeowners aged 65 to 74 in 2019.
Even though older Americans have accumulated substantial retirement wealth and generally have higher average credit scores compared to younger individuals, studies have highlighted a concerning trend. Researchers discovered that despite these advantages, older Americans face a higher risk of mortgage rejection.
The Federal Reserve Bank of Philadelphia conducted a revealing study, indicating that applicants seeking refinanced mortgages encountered a significant rejection rate of 17.5%. Notably, individuals in their 60s experienced a higher rejection rate of 19%, while those aged 70 and above faced an even higher rate of 20%. These findings underscore the challenges older Americans face when applying for mortgages, despite their financial stability and strong credit scores. Interestingly, age was identified as a crucial factor affecting mortgage approval rates across all applicant wealth levels.
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Moreover, the Urban Institute conducted a separate study focusing on applicants for various mortgage types. In 2020, they found that those aged 75 or older had an 18.7% rejection rate, whereas the rejection rate was 15.4% for applicants between 65 and 74 years old, and 12.1% for individuals younger than 65. This research highlights a consistent trend of higher mortgage rejection rates for older Americans, regardless of the specific mortgage type they are applying for. Surprisingly, retirees, who typically possess greater wealth to afford the mortgage and boast better credit scores indicating their ability to repay, were not immune to the higher rejection rates.
This raises the important question of why older mortgage applicants face higher rejection rates compared to their younger counterparts.
Reasons Behind Lenders Rejecting Older Applicants
The study by the Federal Reserve Bank identified that more than half of the rejections among older applicants were attributed to “insufficient collateral,” possibly because lenders appraised the homes for less than what the applicants had anticipated.
Lenders might also be wary of the mortality risk associated with older borrowers. The passing away of the borrower could result in the early payment of the loan, creating a type of reinvestment risk for the lender. This means that the lender may not be able to reinvest the received funds at a comparable or better interest rate. Furthermore, there is the possibility that the property securing the loan might go into foreclosure, leading the bank to incur legal expenses in an attempt to recover at least a portion of the remaining mortgage balance.
Moreover, a retiree’s lack of regular income from employment might diminish their chances of loan approval. Lenders typically prefer to see a steady income from a job, even if the borrower possesses wealth in retirement accounts that could be used to repay the loan. The current elevated interest rate environment has further exacerbated the situation, making it even more challenging for older borrowers to secure mortgage approvals.
Not All Mortgages are Created Equal
Notably, research indicates that differences in mortgage application rejection rates based on age vary depending on the mortgage product. For instance, the Urban Institute study found that while there was a substantial gap in rejection rates between older and younger applicants for cash-out refinances, there was no difference in rejection rates for Home Equity Lines Of Credit (HELOCs) across age groups. This could be attributed to the fact that homeowners tend to gradually access money from the HELOC, and lenders place less emphasis on the borrower’s income when the equity in the home already provides ample collateral.
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Conclusion
Financial advisors can play a vital role in enhancing the chances of mortgage approval for clients of any age. For retired clients, this may involve creating “new” sources of income, such as starting regular distributions from retirement accounts, paying down other debts to reduce their debt-to-income ratio, or considering a reverse mortgage if a traditional cash-out refinance isn’t feasible.