While older Americans tend to have more financial resources and better credit scores than those much younger, a new study has found that the likelihood of being rejected for a mortgage increases with age.
The study is called “Are Older Mortgage Applicants More Likely To Be Rejected?” It was published this month by the Center for Retirement Research at Boston College. It was adapted from a study by Natee Amornsiripanitch, an economist at the Federal Reserve Bank of Philadelphia who is not affiliated with the Center.
According to the study, “The results are robust.”
It continues, “The bottom line is that whether the analysis focuses on age group or individual ages, the probability of rejection of an application increases with age. This result is surprising because credit score and wealth are positively correlated with age.”
The study notes that this pattern emerges regardless of the variables. It notes that the findings are not due to older individuals applying for mortgages with more stringent lenders, and that excluding 2020 applications does not alter the results, indicating that they were not driven by the COVID-19 pandemic.
“Separate estimates for government-guaranteed loans produce the same qualitative results,” the study states, adding that the “pattern is also evident for cash-out refinance applications.”
The study is quick to note that the results “do not necessarily indicate, however, that lenders are violating fair lending legislation.” It cites three reasons for that:
- First, federal regulations allow lenders to consider a borrower’s age in credit decisions under some circumstances.
- Second, the study states that “the results should be viewed as an association between age and rejection — not a causal relationship.”
- Third, “mortality risk has real economic implications for lenders, for which they might require additional collateral,” the study notes.
The study also suggests that an important omitting an important variable related to creditworthiness and age could also lead to a relationship between age and rejections.
“Life expectancy or age-related mortality risk is the obvious example,” it states. “Having a borrower die can be costly to the lender, because it increases the likelihood of the loan being paid off early (prepayment risk) or entering foreclosure (default and recovery risk). All else equal, this set of risks is higher for older borrowers than for younger borrowers.”
It continues, “Therefore, a rational and risk-averse lender should consider age-related risks when making lending decisions.”
According to the study, several factors suggest that “age-related mortality risk could be driving” the study’s findings.
“First, mortality risk, like the probability of rejection, generally increases with age,” the study states. “Second, the increase in rejection probability accelerates in old age, which is consistent with the fact that increases in mortality risk are much larger in old age. Third, the difference in rejection probability between men and women becomes larger in old age, which is consistent with the divergence in mortality risk between men and women in old age. Lastly, the insufficient collateral explanation could be interpreted as lenders requiring the borrower to put up more collateral as age-related mortality risk increases.”
The study concludes by stating that, “Regardless of the reason, however, it is important for older individuals to know that they are more likely to be denied credit.”
You can read the full study here.
