High Salary? This Hidden Factor Could Still Sabotage Your Mortgage Application

The mortgage process is a black box of data points. Applicants hoping to get approved for financing to purchase their first home (or next) submit all their paperwork to the bank and then wait with baited breath for a response. In some cases, this can be a quick turnaround while others have to cross their fingers for days at a time if they opted to use a more traditional method. All manner of potential red flags feature in a homebuyer's financial history, so buyers have to think about a great many prospective hang ups as they navigate the months leading up to their application.

One of the most visible tasks for mortgage applicants is making credit score improvements. Many of the same steps that feature in a credit score boost also help your mortgage loan application. From amplifying the visuals of your budget management capability to the basic threshold your credit score features in (bad credit can weigh you down here and in many other ways), improvements go a long way. There's one other characteristic of credit management that can highlight your responsibility as a borrower or signal a potential issue down the line. It's not your revolving credit utilization (experts suggest somewhere between 10% and 30% as a good to excellent target), nor is it salary and savings figures. This hidden factor is perhaps one of the most important features in your mortgage application, so taking time to understand its impact is crucial.

The primary factor that leads to denied mortgage loan applications is the debt-to-income ratio. The 2024 Profile of Homebuyers and Sellers from the National Association of Realtors calculated its impact, reporting that it sank 40% of all denials. Considering the impact that DTI has on mortgage prospects, it would be expected that everyone would know their personal number and work to impact it in a positive way. However, DTI often flies under the radar, both in high earners' circles and those taking home lower salaries.

The debt-to-income ratio is a sort of equalizer amongst all prospective borrowers. Rather than exploring the total credit line available to a person (often higher among higher earners) or the revolving credit utilization (something that can be influenced greatly by salary figures), this seeks to illuminate another financial truth. DTI is calculated by dividing your total debt expenses by your gross income. All your outgoing obligations from student loans and car payments to credit card bills are totaled and weighed against the sum of your income. This gives lenders a clear image of how much free cash flow you enjoy on a regular basis. A good target is 35%, meaning 35% of your gross salary is tied up in existing debt obligations, leaving 65% left for other needs. Some lenders will approve applicants who have DTI figures as high as 45%, but a 40% debt-to-income ratio is often the ceiling for most borrowers, regardless of how much they make.

Everyone in the modern world who participates in the consumer marketplace has expenditures and income. The way you manage those two halves of the personal finance landscape is telling. There are only two ways to reduce your DTI, so if yours is too high to buy a home you'll want to get serious about tackling one or both approaches. First, you can get a raise. More income means a higher value on the bottom line of the equation and a lower DTI. Unfortunately, creating more income isn't always feasible, and even when it is the pursuit can be draining and lead to burnout. 

The alternative is to slash elements of your budget so that you can pay down your debts faster. Eliminating consumer credit card debt is the most effective way to reduce your debt-to-income ratio, considering the vast amount the average American carries (about $8,700 in 2024). Paying off your credit cards will reduce the top-line figure, but it can be hard to aggressively achieve this outcome without making other budgetary adjustments. Approaches like Dave Ramsey's baby steps suggest putting retirement savings on hold while you work toward this goal, for instance. Mortgage savings are a major priority for many, and this often means making sacrifices elsewhere. In the short term, cutting spending to slash your debts and the resulting DTI figure can make a huge impact in turning the tide on your application, and it's worth it for those striving to transition into homeownership.