At the end of 2019, Molly Stuart’s contract with the community college where she worked expired. “Normally I would just get a new job, but then Covid happened,” she said. So she collected unemployment for a while and then retired.
In 2021, hoping to give herself some financial breathing room, she attempted to refinance the three-bedroom farmhouse she had purchased 18 years earlier on an acre of land in Sacramento County, California.
“I’m an extremely good risk,” said Ms. Stuart, 60, a lawyer. She had a 30-year work history and a credit rating of over 800. Her remaining mortgage was $102,000, but she estimated the house was worth about $500,000. She had already paid off the mortgage on another house in Sacramento that she was renting out.
But her mortgage company rejected her application. “I didn’t qualify for a refinance because I didn’t have enough income,” she said. “It was extremely frustrating.”
But not uncommon. Older adults have higher credit ratings than any other age group, but recent studies have shown that they are significantly more likely to be rejected on most types of mortgages. That creates barriers for older Americans hoping to renovate or modify their homes, or to gain equity as a buffer against medical expenses, widowhood or other crises.
A large part of the wealth of the elderly is tied up in real estate. Among homeowners ages 65 to 74, home equity represented about 47 percent of their net worth in 2019, according to federal data; among the over-75s this was 55 percent. Among black homeowners over age 62, it accounted for nearly three-quarters of their net worth.
But a home is not a financial asset, noted Lori Trawinski, director of finance and employment at the AARP Public Policy Institute in Washington. “It only becomes a financial asset when you take out or sell a loan.”
Getting that loan can be harder than owners expect.
In February, Natee Amornsiripanitch, an economist at the Federal Reserve Bank of Philadelphia, published an analysis of more than 9 million mortgage applications collected through the Home Mortgage Disclosure Act between 2018 and 2020. for applicants over the age of 70.
Focusing on refinancing applications, he reported a rejection rate of 17.5 percent across all ages. But for those in their 60s it was more than 19 percent, and among those 70 and older it was more than 20 percent — statistically significant differences.
In addition, older applicants paid slightly higher interest rates when taking out refinances or new mortgages.
The study’s methodology controlled for credit scores and property types, as well as economic and demographic factors, said Alicia Munnell, director of the Center for Retirement Research at Boston College, who reviewed Dr. Amornsiripanitch republished. “He looks at the well-to-do and the less well-to-do. Age still plays a role.”
While the federal Equal Credit Opportunity Act has long banned discrimination based on age (as well as race, color, religion, national origin, sex, and marital status), lenders are allowed to take age into account if they deem it relevant to creditworthiness.
Dr. For example, Amornsiripanitch found that lenders attributed more than half of their rejections of older applicants to “insufficient collateral.” He speculated that lenders didn’t value those homes as much as applicants had believed, possibly because older owners occupied older homes and may have delayed maintenance.
Lenders are also concerned about the mortality risks of older borrowers. Over the course of a 30-year loan, “someone dying is very inconvenient for a lender and can be costly,” explained Dr. Munnell out. If the mortgage is paid off early, a bank or mortgage company then lends the money again, possibly at a lower interest rate. If the property is seized after a death, the bank can take legal action.
And, as in the case of Ms. Stuart, lenders care about lower income in retirement. “People who have jobs are at a lower risk than people who aren’t,” says Teresa Ghilarducci, a labor economist at The New School for Social Research in New York City. “It’s harder to get a mortgage when you retire.”
That’s especially true because today’s seniors are more likely to be in debt, and more, than past generations. That affects their debt-to-income (DTI) ratios, a metric that lenders pay close attention to.
“High DTI is a major driver of denial,” says Linna Zhu, a research economist at Washington’s Urban Institute whose research has also documented higher rejection rates in old age.
A study she published in 2021 found that 18.7 percent reject a mortgage for people over the age of 75, 15.4 percent for people aged 65 to 74, and 12 percent for people under 65.
Dr. However, Zhu and her colleagues reported that the likelihood of rejection depends on the type of loan. Home equity lines of credit, which charge interest or require repayment only when the homeowner uses the credit, had similarly high rejection rates across all age groups.
In contrast, payout refinances that yield a lump sum — a popular product during the recent period of rising home prices and super-low interest rates — were denied to more than 21 percent of applicants over 75 in 2020, compared to just 14.6 percent of prospective borrowers under the 65 years.
And for home equity conversion mortgages — a type of reverse mortgage guaranteed by the Federal Housing Administration — younger borrowers had even higher rejection rates.
Extremely low interest rates in recent years have made borrowing easier for everyone and masked these age gaps, said Dr. Zhu. But as rates have risen sharply, “it’s going to be more challenging to tap into your equity,” she said.
Policy changes can reduce these age-related barriers. Rather than lenders relying so heavily on income and debt to assess their creditworthiness, “it’s important to look to alternative sources of wealth for a more complete picture of one’s financial background,” said Dr. Zhu.
Changing these ratings would require “a collective effort,” said Dr. Zhu, involving commercial lenders, the federally sponsored Fannie Mae and Freddie Mac, and federal agencies such as the FHA and the Department of Housing and Urban Development.
That approach would have helped Mrs. Stuart, who had significant assets but a modest income in retirement. After her mortgage company rejected her for refinancing, she used her savings to prepay six months of her mortgage — the maximum length of time her lender allowed. That eased the pressure of monthly payments, and she can choose to do it again.
But compared to refinancing, which would have reduced her monthly payments for the next 30 years without depleting her savings, it’s a temporary solution. “It’ll be fine,” she said of her experience. “But it was unreasonable.”
