With mortgage rates hovering around 6.5% for weeks, many would-be homebuyers are wondering whether they should actually buy property in 2026. Is it a good time to buy? Would monthly mortgage payments be too high?
Now, potential buyers should ask themselves yet another question: Will they even qualify for a mortgage with a lender?
New research from the Federal Reserve Bank of St. Louis shows that higher mortgage rates lead to higher rates of mortgage application denials.
I’ve reported on mortgage rates for years, so I know that today’s rates are lower than the historic average. They’re also lower than certain points in 2023-2025, when they were in the 7% range, according to Freddie Mac.
But mortgage rates are still … relatively high. Especially when you compare them with the sub-3% rates during the peak of the COVID-19 pandemic.
Will 6.5% mortgage rates keep Americans from qualifying for mortgage loans? In some cases, yes — but it depends.
Higher mortgage rates lead to higher DTI ratios
Higher mortgage rates result in larger monthly mortgage payments. Mortgage lenders consider your potential monthly payment when you apply for a loan by calculating your debt-to-income ratio, or DTI ratio.
Your DTI ratio is the amount you pay toward debt each month divided by your monthly gross (pre-tax) income, according to the Consumer Finance Protection Bureau (CFPB).
When mortgage lenders assess your DTI ratio, they include the amount you would spend on monthly housing payments in their calculation. Many lenders prefer you to spend 36% or less of your pre-tax income on all debt payments (though requirements vary by lender and type of mortgage loan).
Related: More on mortgages and the housing market
For example, let’s say your gross monthly income is $5,000. Your existing minimum debt payments are $300 toward student loans and $200 on a car payment each month. If apply for a mortgage to buy the house you want at the current mortgage rate, your monthly housing payment will be $2,000.
After buying a home, your monthly debt payment obligations would be $2,500, or 50% of your monthly earnings. This is too high for most mortgage lenders to approve.
DTI ratios were the cause of mortgage application denials 29% of the time in 2018, when 30-year mortgage rates ranged from the upper-3% to upper-4% range, according to the St. Louis Fed.
By 2024, mortgage rates were in the upper-6% area, at times surpassing 7%. That year, DTI ratios became the primary reason applications were denied, making up 35% of rejections.
Denial rates also climbed from 13.6% to 15.1% between 2018 and 2024, according to Home Mortgage Disclosure Act (HMDA) data.
“The rate increase alone can account for 100% of the rise in the aggregate denial rate,” Manu Garcia and Carlos Garriga wrote for the St. Louis Fed.
Mortgage rates and DTI ratios hurt only certain Americans
High mortgage rates and debt-to-income ratios aren’t typically keeping wealthier Americans from qualifying for mortgages.
“Higher interest rates have put increased pressure on loan qualification for low-to-middle-income homebuyers,” Corey Burr, Senior Vice President at TTR Sotheby’s International Realty, told TheStreet.
The St. Louis Fed research found that applicants who were already hovering near the DTI ratio limit with lower interest rates were the ones who started getting denied when rates increased. Those being rejected had low-to-moderate incomes, owed more debt, or lived in higher-cost-of-living areas.
“A rate hike of identical magnitude is irrelevant to a borrower with a debt-to-income ratio of 25% but devastating to one at 48%,” Garcia and Garriga wrote. “This means that tightening cycles don’t just reduce the volume of homebuying; they selectively filter out the most financially constrained applicants.”
More on mortgages and home affordability:
- Fannie Mae forecasts change in mortgage rates, housing market
- Americans face major decision after new mortgage rate forecast
- Zillow discovers changes in mortgage rates, housing market
While this trend is discouraging and sometimes even unfair, mortgage lenders aren’t necessarily rejecting applications because they’re out to get lower-income buyers. It’s because they don’t want to repeat history.
“While I anticipate this will not be a long-term phenomenon, it’s important that the mortgage keep the qualification standards firm so that mortgages are not issued to less-than-qualified buyers like what happened in 2005-2008 leading up to the market crash in mid-2008,” Burr said.
Tips for mortgage application approval
As mortgage rates remain high, here are some crucial ways to improve your debt-to-income ratio and your chances of being approved for a mortgage loan:
- Pay down debt. This may seem obvious, but it’s still crucial to mention. “For buyers who are on the fence regarding their ability to get a loan, the main challenge is to pay off debt so that the debt-to-income ratios come down and the chances of loan approval increase,” Burr told TheStreet.
- Use any financial windfalls to pay off debt. Did you receive a tax refund, work bonus, or financial birthday gift from a family member? Consider using that money to pay down your debt principal.
- Cut back on discretionary spending. You don’t have to eliminate all fun spending. But find a couple areas where you can spend less, then put that money toward paying down debt.
- Earn more. This is another tip that might seem obvious (and easier said than done). But half of your debt-to-income ratio is the “income” part. If your annual job review is coming up, it might be the right time to ask for a raise. You could also pick up a side gig or part-time second job.
