Do People Leave Money on the Table? Evidence from Joint Mortgage Applications and the Minimum FICO Rule

Abstract

There is mounting evidence that households make suboptimal savings and investment decisions. For example, Choi, Laibson, and Madrain (2011) show that less-than-optimal contributions to 401(k) plans may lead to more than $500 in financial losses. Agarwal, Skiba, and Tobacman (2009) and Bertrand and Morse (2009) document that borrowers take payday loans with astronomical APRs when cheaper forms of credit are available. Moreover, consumers with multiple credit card offers often fail to choose the right credit card (Agarwal, Chomsisengphet, Liu, and Souleles, 2015). In a similar spirit, this note presents novel evidence that many mortgage borrowers appear to have failed to apply for mortgages that give the lowest interest rates. Specifically, we find that nearly 10 percent of prime borrowers who applied for their loans jointly could have lowered their mortgage interest rate at least one eighth of 1 percentage point if the mortgage was applied for by the applicant with a higher credit score and an income high enough to qualify for the mortgage. Furthermore, among the joint applicants with a lower credit score below 740, for whom mortgage interest rates are most sensitive to credit scores, more than 25 percent could have significantly reduced their borrowing cost by having the individual with a higher credit score apply. This is due to the fact that when lenders price mortgages with joint applications, the interest rates are determined by the lower score of the two - often known as the minimum FICO rule. We estimate that such borrowers could reduce their annual interest payment by between $220 and $1,400. Consistent with the existing literature, we find that couples who appeared to have left money on the table tend to have lower credit scores and be much younger and less financially sophisticated.