Three Reasons Older Mortgage Applicants are Denied

Many Americans jumped on the opportunity to harvest some of their home equity as values skyrocketed in the wake of the COVID-19 pandemic. Yet, many older homeowners’ applications for a Home Equity Line of Credit (HELOC) or cash-out refinance were rejected. 

While the Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating against credit applicants based on age, there are exceptions in denying credit based on numerous factors including age. Here are four reasons older credit applicants have a higher rejection rate than younger cohorts. 

A Stable & Predictable Income

Lenders love borrowers with predictable and stable sources of income. While Social Security is certainly one source of consistent income during an individual’s lifetime it’s not necessarily for a surviving spouse. 

For example, what happens if a married couple receives individual Social Security payouts and one passes away? Unfortunately, you cannot claim both your deceased spouse’s benefits in addition to your own. In such instances, Social Security will pay out the larger of the two monthly payments if the survivor has their own Social Security retirement benefits. Usually, this works in the favor of a widow whose husband earned significantly more than his wife and contributed more over his working years. This is just one example when retirement income can be significantly reduced impacting an applicant’s loan approval.

Then there are pension survivor benefits. Defined pension plans typically offer plan participants the option to choose a payout plan at retirement. Typically, a full pension payout of 100%, 75%, or 50%. A retiree wanting to ensure their spouse receives a full monthly payment will receive lower monthly payments during their lifetimes in exchange for income security. However, my experience has shown me many couples opt for a 50-75% survivor benefit to maximize their monthly pension benefit not considering what lies ahead should their spouse have their monthly income reduced by 25% or more.

Retirement savings invested in the stock market must account for fluctuations in value as any loss of principal could impact the income taken from their portfolio. Substantial portfolio losses often prompt retirees to reduce their withdrawals reducing their cash flow.

Debt-to-Income Ratios

Poor spending habits don’t stop in retirement. If anything, they’re a reflection of an individual’s approach to money management during their working years. Consequently, some applicants have accumulated significant credit card debt or perhaps recently refinanced their home straining their ability to increase their monthly debt payments. A higher DTI gives lenders pause in approving a loan. 

Age (Mortality Risk)

Yes, under certain circumstances lenders can consider an applicant’s age for long-term loans such as a mortgage or a HELOC. A 75-year-old seeking a new 30-year cash-out refinance mortgage may find their lender reluctant to approve the loan as it is unlikely they would live until the ripe age of 105. 

The Equal Opportunity Credit Act states, “While a creditor cannot reject an application or terminate an account because an applicant is 60 years old, a creditor may consider the applicant’s occupation and length of time to retirement to determine whether the applicant’s income (including retirement income) will support the extension of credit to its maturity.”

In addition, a borrower’s death is inconvenient and costly for the lender said Alicia Munnell with the Center for Retirement Research.  

Knowing this reverse mortgage professionals should work with traditional lenders who may be unable to qualify mortgage applicants seeking to tap into their home equity. Many may qualify for a Home Equity Conversion Mortgage (HECM) or a proprietary mortgage who find their efforts blocked by traditional mortgage underwriting.