When an older client is rejected for a mortgage, seek alternatives: financial planner

Didier Malagies • August 4, 2023


Research suggests that older clients seeking mortgage financing are rejected for loans at higher levels than their younger counterparts, which could be due to several different factors including mortality risk, the appraisal of a current home and a lack of employment income. This is according to Adam Van Deusen, a certified financial planner in a new column at The Street.


Citing studies from institutions including the Federal Reserve Bank of Philadelphia and the Urban Institute, “applicants for all types of mortgages found a rejection rate of 18.7% for those aged 75 or older in 2020, compared to 15.4% for those between 65 and 74 and 12.1% for those younger than 65,” he said.


This is despite the fact that on average, older Americans have higher levels of wealth than their younger counterparts. But lenders could be looking beyond current asset levels when making an approval decision, he explained.


“To start, the Fed study found that more than half of the rejections of older applicants were due to ‘insufficient collateral,’ perhaps because lenders appraised the homes for less than the applicants had thought,” he wrote.


A perception of higher mortality risk could also be playing a role in a decision to deny a loan, he said.

“[T]he death of the borrower could lead to the loan being paid off early (a form of reinvestment risk for the lender, as in the case of borrower’s death, the lender might not be able to re-lend the proceeds at a similar or higher rate), or the property could end up in foreclosure, which could cost the bank legal fees to recover (at least a portion of) the amount left on the mortgage,” Van Deusen wrote.


Lenders may also look sideways at an applicant’s income if it does not come from traditional sources, like a paycheck.


“[A] retiree might find that their lack of regular income from employment could reduce the chances of being approved for a loan (as lenders prefer to see regular income from a job, even if the borrower has wealth in retirement accounts that could also be used to repay the loan),” he wrote. “And, in the current elevated interest rate environment that has raised the cost of borrowing (and the income needed to support payments), older borrowers might find it even harder to be approved for mortgages.”


One way that financial advisors can help senior borrowers get over these potential hurdles is by suggesting loan products most appropriate for a client’s needs, which could include a reverse mortgage, Van Deusen wrote.



“[F]or retired clients, this could mean creating ‘new’ sources of income (e.g., by starting regular distributions from retirement accounts), paying down other debt to reduce their debt-to-income ratio or — for those with home equity — considering a reverse mortgage if a traditional cash-out refinance isn’t viable,” he said.

 


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