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Mortgage Rejection Rates Spike as You Age

You’ll pay more for a home loan, according to new research 

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Obtaining a mortgage as you age can be difficult, and when you do get one, you’re apt to pay more, according to research from the Federal Reserve Bank of Philadelphia. That may come as a surprise since older adults tend to have more financial means and higher credit scores than younger borrowers. 

“Older applicants for a mortgage refinance generally face higher rejection probabilities. This empirical pattern is robust within lenders and across loan types,” wrote Natee Amornsiripanitch, an economist at the Federal Reserve Bank of Philadelphia. Moreover, the economist found, older adults who get a mortgage tend to pay more than their younger counterparts.

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Age is a factor

To determine what role age plays in all this, Amornsiripanitch looked at more than 5 million rate-and-term refinance mortgage applications, homing in on those made by people over the age of 50, which account for about 40 percent of refinance applications. Amornsiripanitch found the following: ​

  • The overall average rejection rate is 17.5 percent.
  • Rejection increases with age across the board with lenders.  
  • Around the age of 70, rejection rates accelerate. 
  • Relative to race and ethnicity, applicant age plays an equal role in mortgage approval.
  • The probability of rejection is lower for women. By looking at Fannie Mae and Freddie Mac data, Amornsiripanitch found mortgage rates increase with age, with an ultimate difference of 8 basis points between homebuyers in their 30s and those 70-plus. (A basis point equals 1/100 of a percentage point.) That may not make or break a deal, but it does show older adults pay more when they are approved for a home loan. ​

Riskier proposition

The Equal Credit Opportunity Act prohibits lenders from rejecting an applicant based on race, color, religion, national origin, sex, marital status and age, but the law does allow lenders to use age as part of the credit scoring system. For instance, lenders can look at age to see how close a person is to retirement and how that will affect their ability to repay. 

Amornsiripanitch couldn’t point to a definitive reason why lenders rejected more mortgage applications from older adults, but he said that based on the underwriters’ explanations, there’s evidence a few things are going on: ​

Not enough collateral. A mortgage is a loan secured by real estate as collateral. In some cases, the value of older borrowers’ collateral declined since they took out the original loan. 

Mortality. Lenders are worried older borrowers may repay the loan early, or that they will die and the property go into foreclosure, which can be costly to the lender. ​

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In addition to those findings, too high a debt-to-income (DTI) ratio is a common reason borrowers are turned down for a mortgage, more so for older adults, says Brian Rugg, chief credit officer at loanDepot. Often it’s not because the borrower can’t afford the loan, it’s that the loan officer doesn’t know he or she can. When you’re working, lenders look at your pay stubs and use that income to underwrite the mortgage. Once you’re retired, cash flow may come from a pension, 401(k), IRA, Social Security and other income such as rent from an investment property. If the lender doesn’t ask about that income and you don’t offer the information, your loan is likely to be rejected. Rugg pointed to one case in which an older adult got turned down because the lender used only Social Security income to calculate the DTI ratio. Once other income was included, the mortgage was approved. 

What you can do

To secure a mortgage at a reasonable rate, retirees have to be forthcoming about their finances and lenders have to be well-steeped in the needs of older borrowers. If the lender you’re working with isn’t asking the right questions and taking pains to understand your financial situation, you should move on. “If you’re not comfortable with the level of acumen the lender has about your situation and you aren’t overturning every rock, you might miss out on the opportunity to get a loan that is advantageous to you in retirement,” Rugg says. ​

Comparison shopping is important. Amornsiripanitch found the 8-basis-point increase in rejection rates may be due to the borrower not doing the research. That could be driven by physical or mental fatigue, as well as an aversion to technology. “It’s easier to get a lot of different quotes on an app or on the internet,” says Anqi Chen, senior research economist and the assistant director of savings research at the Center for Retirement Research at Boston College. “Older Americans may not be as familiar and are not using some of these new technologies to shop around for mortgages.” If you don’t have access to the internet, comparison shop via phone. Start with your existing lender, then check out the rates at a credit union, bank and other mortgage providers to get the best rate. 

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