Higher mortgage rates push application denial rates up: St. Louis Fed

Higher interest rates do more than just deter potential homebuyers — they may also block consumers from qualifying for a mortgage, according to new research.

The rate of denials in loan applications was 15.1% in 2024, up from 12.2% in 2021, a rise that occurred alongside a surge in mortgage rates from below 3.5% to more than 6.5%, researchers at the Federal Reserve Bank of St. Louis said in a new blog post.

At the same time, however, fewer consumers were applying for mortgages as rates peaked at 8% in 2023, the research shows. Total applications fell to 3.5 million that year — when the denial rate was 15.7% — from more than 5.2 million in 2021. The St. Louis Fed researchers used data covering more than 30 million home purchase applications.

With the current average rate on a 30-year fixed-rate mortgage at 6.61% as of Wednesday, according to Mortgage News Daily, affordability issues have changed little from the time period examined in the research, experts say.

“The dynamics are the same,” said Jessica Lautz, deputy chief economist and vice president of research for the National Association of Realtors, a trade association for real estate professionals. “I would say the pressures that the bottom half of the K-shaped economy was feeling are still there.”

The median price of an existing home in the U.S. was $417,700 in April, up a modest 0.9% from $414,000 a year earlier, according to the National Association of Realtors. However, that figure is about 22% higher than in April 2021, when it was $341,600, and 45.6% above the April 2020 median price of $286,800.

One reason for the rise in mortgage application denials at higher interest rates is that the borrower’s debt-to-income ratio is coming in too high, according to the St. Louis Fed research. Lenders use that ratio to measure how much of a borrower’s income will be eaten up by debt payments each month, including a proposed mortgage payment.

“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,'” the researchers wrote. “Rising rates don’t just price people out of the houses they want; they lock people out of the credit they need.”

Lenders prefer to see that ratio at 36% or below, but depending on other factors — including credit history, assets and income — they may approve an applicant whose debt-to-income ratio is higher, experts say.

However, for many lenders that do conventional mortgages, there’s a hard cut-off at a 50% ratio, according to experts.