Older adults tend to have higher credit ratings than any other age group in the nation. However, older Americans are also more likely to be denied a mortgage for reasons directly associated with their age: low income in retirement, a higher likelihood of health complications and a higher likelihood of carrying more debt, according to a recent New York Times article.
The article, which cites data from recent studies by the Boston College Center for Retirement Research (CRR) and insight from other organizations like AARP and the Urban Institute, states that:
“[Mortgage application rejection] raises barriers for older Americans hoping to renovate or retrofit their homes, or to extract home equity as a buffer against medical expenses, widowhood or other crises. Much of older adults’ wealth is tied up in real estate. Among homeowners aged 65 to 74, home equity represented about 47% of their net worth in 2019, according to federal data; among those over 75, it was 55%. Among Black homeowners over 62, it accounted for almost three-quarters of their net worth.”
Lori Trawinski, director of finance and employment at the AARP Public Policy Institute in Washington, D.C., told the Times that homes are not seen as a financial asset.
“It only turns into a financial asset if you take out a loan or you sell it,” she said.
Lenders are also concerned about mortality risk when lending to older borrowers, Alicia Munnell, the head of the Boston College CRR, said.
“[During a 30-year mortgage], someone dying is really inconvenient to a lender and can be costly,” Munnell said.
A high debt-to-income ratio is also a key reason for an older person’s application being denied, according to Linna Zhu, research economist at the Urban Institute. However, the likelihood of denial can vary depending on the type of loan.
Mortgage and Home Equity Line of Credit (HELOC) denial rates were similarly high when compared for this age group, according to the story. Interestingly, Home Equity Conversion Mortgage (HECM) denial rates were higher for younger borrowers, though minimum age to qualify for a HECM is 62.
Borrowing was made easier for many during the pandemic because of historically low interest rates, but as rates have risen sharply over the past several months, it will become more challenging to tap equity, Zhu said.
“[I]t’s important to look at alternate sources of wealth for a more comprehensive picture of someone’s financial background,” Zhu said.
