Getting a mortgage could become more difficult and expensive as you age. For most Americans, especially young adults, homeownership remains out of reach with the average purchase price for a home nearly doubling over the past 10 years and mortgage interests at their highest rates since the mid-2000s. Stagnant wages and growing debt have also crowded out most other forms of spending and saving, making it difficult for many people to save up for a down payment. But waiting to buy a home until you are older could also cost you more. Here’s what you need to know.
A financial advisor can help you create a financial plan for your homebuying needs and goals.
How Age Can Make It Harder to Get a Mortgage
As Federal Reserve economist Natee Amornsiripanitch noted in a recent brief, older mortgage applicants are “significantly” more likely to be rejected for a loan than similarly situated, but younger, borrowers. At the same time, loan rates increase steadily with age, peaking for new borrowers over the age of 60 and 70. The difference of interest rates is less pronounced, as lenders charge older applicants modestly higher interest rates while they reject older applicants much more often, but both trends are still very real.
While it seems that mortgage lenders consider older borrowers a greater risk due to issues of income and mortality, homebuyers should note that under Equal Credit Opportunity Act makes it illegal for lenders to deny loans based on age.
For reference, the Consumer Financial Protection Bureau says that “[a] lender generally can’t deny your loan application or charge you higher interest rates or fees because of your age. This rule applies to various types of lenders when they’re deciding whether to give credit, such as an auto loan, credit card, mortgage, student loan, or small business loan.”
But there are two exceptions to this rule. The first exception allows lenders to account for age as long as they do so in favor of applicants age 62 or older. This is a relatively common practice in discrimination laws, which typically allow direct consideration of age so long as it benefits older individuals. But the second exception, however, can seriously hurt older borrowers. While lenders aren’t allowed to explicitly consider an applicant’s age in the mortgage process, they can relate age to other, permissible factors.
For example, a lender may consider how close the applicant is to retirement or what mortality risks are involved with this loan. They can also consider factors that typically correlate with age, such as whether someone will repay the loan with the returns from an investment portfolio rather than earned income. And this can create a problem for many older borrowers.
Money is often not the issue for older Americans. As they enter retirement, the baby boomer generation still holds around two-thirds of the country’s wealth. According to the Federal Reserve, adults in their 60’s and 70’s own about $70 trillion in collected assets. That compares favorably with $39 trillion held by Generation X. It’s almost nine times what millennials own, a generation that’s collectively worth only about $8.8 trillion. If anything, raw finances suggest that older borrowers should have a far easier time getting loans than their younger counterparts.
Yet baby boomers’ wealth is increasingly concentrated in assets rather than income. Many retirees live off investments such as 401(k) plans, IRAs and the wealth in their homes. For lenders this creates a credit risk. Portfolio drawdowns aren’t a basis to reject someone’s loan, but they make a credit analysis more complicated than with a structured W-2 income. The process raises questions like asset mix (does the applicant have higher- or lower-risk assets in their portfolio), method of withdrawal (do they take structured minimum distributions or withdraw cash as needed), returns over time (how much will borrowers depend on continued returns to repay the loan) and overall household wealth.
Lenders generally treat an investment portfolio as a less predictable source of income with which to repay the loan. This can make banks more likely to reject loans from retirees, and more likely to treat as risky the loans they do approve.
Even more importantly, lenders consider mortality risks when they make their loans.
The death of a borrower can be very expensive for a mortgage lender. At best, it creates what’s known as “prepayment risk,” the chance that someone will pay off their loan very early before the lender has a chance to collect much interest. At worst, it can tie up a property in probate and foreclosure issues for years. Just as they do for applicants with a terminal illness, lenders account for the potential lifespan of older applicants before they approve a loan.
All of this creates an atmosphere of risk around older borrowers. The upshot is that if you’re over the age of 62, you’re almost 30% more likely to get rejected for a standard mortgage.
Still, this does not explain Amornsiripanitch’s findings when it comes to the interest rates on newly approved mortgages.
In addition to rejection rates, adults over 60 do pay higher interest rates than younger borrowers. But, Amornsiripanitch found, this trend applies across the board. Interest rates steadily increase across all ages, with borrowers in their 50’s paying more than those in their 40’s, who in turn pay more than a new borrower in their 30’s. In fact, when it comes to loan rates, Amornsiripanitch’s data suggests “that age is larger and consistently more statistically significant than race.”
The older you get, the more likely it is that you have the money to buy a nice home. The more likely it also is that the bank will reject your mortgage application or charge you higher interest rates.
With interest rates fluctuating, many people are trying to figure out exactly what they can (and should) afford. SmartAsset’s mortgage calculator can help you get an estimate for how much home you could buy.
A financial advisor can help you create a financial plan for your homebuying needs and goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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