Why More Older Mortgage Applicants Are Denied Credit
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. BY Shannon Hicks
7 Reasons to Use Home Equity
Due to persistent inflation over the past few years, borrowing costs are at record levels. The average interest rate on credit cards assessed interest is 22.76%, according to the latest data from the Federal Reserve. This represents an increase of over 6% in the past four years. That said, one bright spot if you’re a homeowner is that although home equity rates have risen, they remain much lower than rates for credit cards. Two popular ways to use your equity include home equity loans and home equity lines of credit (HELOCs). If you need to borrow money, here are seven popular reasons to use your home’s equity. Vaults Viewpoint 1. Home Renovations and Improvements One of the most popular reasons to use home equity is to pay for home repairs. Home improvement projects can spruce up your living space and some renovations (kitchen and bathroom remodels, for example) may even increase your home’s value. Plus, another pro is that if you itemize your taxes when you file, you could deduct the interest paid on a home equity loan or HELOC. Pros Cons 2. Consolidating Debt If you’re struggling to pay off credit credit debt (or other high-interest debt), consider using your home equity to refinance. Paying off debt with a home equity loan or HELOC could save you thousands on interest since they often come with more favorable rates. However, keep in mind that if you refinance to a longer-term, you could end up paying more interest over the life of the new loan. Pros Cons 3. Emergency expenses If you don’t have an emergency fund—or an unexpected expense would exhaust your savings—tapping your home’s equity is one solution. It’s likely a cheaper solution than using a credit card, unless you can qualify for one with a 0% APR promotion. However, there are some drawbacks to consider. For example, depending on the lender, it can take up to three weeks to receive home equity loan funding. As a result, it might not be the best choice if you need funds immediately. Pros Cons 4. Covering Major Purchases Taking out a home equity loan or HELOC could also help you pay for major life events, such as a wedding or a trip for a milestone birthday. However, you may want to think twice before you put your home on the line to cover an unnecessary expense. Only pursue this route if you can comfortably afford to repay the loan. If you default on the loan, a lender can take your home. Pros Cons 5. Funding Education Another reason to use your home’s equity is to cover your (or your children’s) education expenses. If you can secure a lower rate than a student loan, it could be a wise choice. Plus, it could make sense to use your home’s equity to fund your education if you’ve exhausted your federal student loan limits. Before you take this route, explore all of your options (starting with federal loans). Unlike federal student loans, a home equity loans and private student loans don’t come with access to student loan forgiveness programs and income-driven repayment plans. Pros Cons 6. Retirement Planning If you need help covering expenses during retirement, using your home equity could help. You could take out a home equity loan or HELOC to cover medical bills or everyday expenses. However, using a home equity loan or HELOC might not be ideal if you’re on a limited fixed income. That’s because you may struggle to repay the debt. If you’re looking to supplement your retirement income, consider a reverse mortgage. Unlike a traditional mortgage, the lender gives you a lump sum of money or pays you in installments. You then repay the lender the original amount, including interest, when you sell the home or pass away. Before you take one out, though, make sure you understand the pros and cons of a reverse mortgage. While it can provide much-needed income, it can make it more difficult to pass down a home to your heirs. Plus, if you fall behind on paying your home insurance or property taxes, a lender can foreclose on your home. Pros Cons 7. Investing in Real Estate You could also use your home’s equity to put a down payment on an investment property. Note that this only makes sense if the return you can get from your investment exceeds the borrowing costs on your loan. Pros Cons When to Use Your Home’s Equity Borrowing against your home’s equity could be a smart financial move if you think the benefits outweigh the drawbacks. For example, while tapping your equity could be the cheapest option, you could lose your home if you don’t repay the loan. If you need help deciding whether it’s right for you, contact a financial advisor who can provide advice based on your complete financial picture By Jerry Brown