New findings show that the share of rejected mortgage applications rose to 15.1% in 2024, up from 12.2% in 2021. This increase coincided with mortgage rates climbing from below 3.5% to above 6.5%, according to researchers from the Federal Reserve Bank of St. Louis in a recent blog post.
At the same time, application volumes declined significantly as rates peaked near 8% in 2023. That year, total mortgage applications dropped to 3.5 million, compared with more than 5.2 million in 2021, while the denial rate reached 15.7%. The analysis is based on data covering over 30 million home purchase applications.
Currently, the average 30-year fixed mortgage rate stands at 6.61% as of Wednesday, according to Mortgage News Daily, meaning affordability conditions remain broadly similar to the period studied, experts say.
Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors, said: “The dynamics are the same. I would say the pressures that the bottom half of the K-shaped economy was feeling are still there.”
Affordability weakens in April
Affordability declined further in April, as the median mortgage payment requested by applicants rose to $2,152 from $2,131 in March, according to the Mortgage Bankers Association.
Home prices also remained elevated. The median price of an existing U.S. home reached $417,700 in April, up 0.9% from $414,000 a year earlier, according to the National Association of Realtors. That figure is also roughly 22% higher than April 2021, when it was $341,600, and 45.6% above April 2020’s median of $286,800.
Debt-to-income pressures driving denials
One key reason for rising mortgage denials is that borrowers are more frequently exceeding acceptable debt-to-income (DTI) ratios, according to the Federal Reserve Bank of St. Louis research. Lenders use DTI to measure how much of a borrower’s monthly income goes toward debt payments, including the proposed mortgage.
“When rates rise, the entire distribution of debt-to-income ratios shifts to the right, pushing a larger share of the applicant pool above the hard thresholds where lenders start saying ‘no,’” researchers wrote. “Rising rates don’t just price people out of the houses they want; they lock people out of the credit they need.”
Most lenders prefer a DTI ratio of 36% or lower, though approvals can still be granted above that depending on credit history, assets, and income. However, for many conventional mortgage lenders, a 50% DTI level effectively acts as a strict cutoff.
High DTI responsible for growing share of denials
The Fed’s research found that high debt-to-income ratios accounted for 35% of mortgage denials in 2024, up from 29% in 2018. According to Carlos Garriga, director of economic research at the Federal Reserve Bank of St. Louis, this pattern appears across credit score levels.
He noted that even top-tier borrowers face a sharp increase in rejection once their DTI exceeds 50%, pointing to automated underwriting systems used by Fannie Mae as a key factor. “Pristine credit or a six-figure income cannot override a blunt software gate that looks only at a binary financial ratio,” he said.
Fannie Mae is the largest purchaser of mortgages on the secondary market, and its guidelines heavily influence lender approvals since most lenders aim to sell loans to it. The company packages these mortgages into mortgage-backed securities for investors.
Some lenders also rely on Freddie Mac, another major mortgage buyer. Unlike Fannie Mae, Freddie Mac’s automated system does not enforce a strict 50% DTI cutoff, according to Garriga.
Student debt adds further pressure
Beyond high rates and elevated home prices, student loan debt continues to weigh on first-time buyers by increasing debt-to-income ratios, Lautz said.
Student debt remains “typically one of the biggest hurdles for young adults to qualify for a mortgage,” she said, adding that while demand remains strong, many younger households are still locked out of the market. “There’s a ton of pent-up demand. We have a huge share of young adults who would like to come into the housing market,” Lautz said.
