Mortgage Rejections Surge after Age 50
You’re over 50. You have built up a lot of equity in your home, and your life savings is finally gaining some critical mass.
And yet, your odds of being rejected for a refinancing mortgage start going up rapidly after age 50 and really accelerate around 70, according to a study by Natee Amornsiripanitch at the Federal Reserve Bank of Philadelphia. This evidence, concludes a recent summary of the study, “is large and robust.”
The research has important implications for older workers trying to prepare financially for retirement or retirees planning to change their living arrangements. Higher rejection rates can throw a wrench into refinancing an existing mortgage, cashing out some home equity, and possibly downsizing to a less expensive home.
Yes, rejecting borrowers based on age is illegal. The Equal Credit Opportunity Act bars discrimination due to age, race and many other reasons. However, the law does allow bankers to take into account factors like the “length of time to retirement” and “the life expectancy of the applicant” that indicate the risk to the banker that a borrower won’t be able to pay back the loan or see it to term.
The researcher analyzed rejection rates for refinance mortgages in seven age groups, starting at 18. The incremental increases in the probability of being rejected for a mortgage rise sharply in the three oldest groups: the 50s, the 60s, and 70 and over. To put the older borrowers’ rejection rates in perspective, within the sample of mortgage applications studied, they exceed the rates for Black and Hispanic borrowers, whom other research has also shown are denied mortgages at higher rates than White borrowers.
This study may surprise older borrowers, who tend to have higher credit scores that would seem to make it easier – not harder – to borrow money. The researcher focused on a couple reasons for the higher rejection rates.
One is insufficient collateral, which probably stems from the fact that older people have a harder time completing the maintenance required to protect their property values. A second issue is higher mortality as we age: the older a homeowner gets, the more likely he is to stop paying a mortgage prematurely. Closing out a mortgage early can be costly to bankers who lose a source of income and potentially a substantial amount if the interest rate on the loan is higher than the rates they’re offering to new customers.
Whatever the reason for being denied a new mortgage, the researcher said, “it is important to understand how aging affects an individual’s ability to access credit because many individuals do and will spend a larger portion of their lives as senior citizens.”
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What if you downsize and can pay cash for a smaller home or condo? Say you’re 75 and reap $400,000 in home equity for a home that’s now too large. Are there any obstacles to buying a new, cheaper place with cash?
Mortgage applicants are a select subset of people who would like to borrow on a mortgage. The study therefore says nothing about the ability of older Americans to access credit. And nobody should ever submit a mortgage application without first checking if they meet the lender’s criteria and be as certain as they can be that the application will be approved. Anyone who does otherwise is financially illiterate and the study therefore speaks not to age related differences in access to credit but age related differences in financial literacy.