Surprise! There's a Gender Gap in Mortgages, Too
The gender gap in earnings is well known. According to a recent report by the Economic Policy Institute, the typical woman can expect to earn 83 cents for every dollar that the typical man earns.
But studies show another gender gap that negatively impacts women: Research published by the Urban Institute in September said that women tend to pay more for their mortgages even though they are statistically more likely to pay their loans on time than men.
The Numbers
According to the Urban Institute, about 15.6% of female borrowers have what is known as a "higher-priced mortgage." Borrowers with such mortgages are charged higher interest rates to borrow their home-loan dollars.
How high these rates are at any given time varies. The Urban Institute uses the same definition of higher-priced mortgage used by the Home Mortgage Disclosure Act: a mortgage loan with an annual percentage rate that is higher than the benchmark interest rate known as the Average Prime Offer Rate. That rate stood at 3.58% for a 30-year fixed-rate loan as of June 20 of this year.
The Consumer Financial Protection Bureau considers a first mortgage loan to be a higher-priced mortgage if its annual percentage rate is 1.5% or more higher than the Average Prime Offer Rate.
The Urban Institute found that while 15.6% of female-only borrowers are paying off higher-priced mortgages, just 15% of male-only borrowers are doing the same. The institute found that male-female borrowers who apply for loans together receive higher-priced mortgages only 7.6% of the time.
Why Are Women Paying More?
Why do single women pay more for their mortgages? It's difficult to tell. It might come down to income. The Urban Institute reported that single female borrowers tend to have lower annual incomes than single males. According to the institute, single female borrowers earned an average of $69,200 a year. Single male borrowers had an average income of $94,700. Male-female borrowers had an even higher annual income of $119,000.
Income is one of the financial factors that lenders consider when deciding who qualifies for a mortgage and what interest rates they pay. Lenders often charge higher rates as a form of financial protection when they worry that borrowers' incomes are lower, because they fear that these borrowers will be less likely to pay their loans back on time.
Borrowers with lower incomes also have less money for a down payment. When borrowers put down less for a house, they are typically charged a higher interest rate, again to make up for the extra risk that lenders take on when loaning them money. Lenders assume that borrowers who put less money down are more likely to stop paying their mortgage loan if they suffer a financial crisis.
But what about FICO credit scores? These three-digit numbers tell lenders whether borrowers have a history of paying their bills on time or if they tend to miss payments and run up credit card debt. Lenders charge higher interest rates to borrowers with low credit scores.
But from 2004 to 2014, the Urban Institute found, female-only borrowers had an average FICO credit score of 711, similar to the average 712 score of male-only borrowers. That score is significantly lower, though, than the 725 average score submitted by joint male-female borrowers.
Credit bureau Experian reported in March of this year that the average FICO credit score for all women is 675, a bit higher than the average score of 670 for men. Women also had 3.7% less average debt than men, according to Experian.
Better Record
Despite paying more for their mortgages, female-only borrowers tend to do a slightly better job of paying them on time than do male-only borrowers. According to the Urban Institute, female-only borrowers had a default rate on their loans of 9.6% from 2008 through 2010. Male-only borrowers had a slightly higher default rate of 9.7% during this same time.
What to Do?
What does all this mean for women applying for mortgage loans? If they are applying for mortgages on their own and want the lowest interest rates possible, they need to make sure that their finances are strong.
This means that their FICO credit score should be at least 740 if they want to qualify for the lowest interest rates. It also means that their monthly debts, including their estimated new mortgage payment, should be 43% or less than their gross monthly income.
Single male borrowers need to focus on the same factors, of course. But the research from the Urban Institute indicates that strong FICO scores and debt-to-income ratios are especially important for single females who want to avoid the financial burden of a higher-priced mortgage.
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