Mortgage applications are facing increasing rejections due to "insufficient income.

As surging home prices and interest rates lead to higher monthly mortgage payments, obtaining a mortgage has become increasingly challenging for many consumers.

In the past year, lenders turned down loan applications due to "insufficient income" more frequently than ever before, according to a recent report by the Consumer Financial Protection Bureau, which has been recording data since 2018.

In total, the consumer watchdog agency reported that 9.1% of all applicants seeking to purchase homes had their applications denied in 2022, marking an increase from 8.3% in 2021 but a slight decline from 9.3% in 2020. For refinance applications, the rejection rate surged to 24.7% in 2022, up sharply from 14.2% in 2021.

Among denials, "insufficient income" was the primary reason, accounting for over 50% of rejections for Asian American applicants, 45% for Black and Hispanic applicants, and approximately 40% for white applicants. These figures have risen from below 40% for each of these groups in 2018.

The CFPB also highlighted that the average monthly mortgage payment cost increased by 46% to $2,045 in December 2022, up from $1,400 in December 2021. Given the rising costs of both payments and mortgage rates, which have been influenced by the Federal Reserve's rate hikes, these trends in income-based denials shouldn't come as a surprise, noted Barry Glassman, a certified financial planner and founder of Glassman Wealth Services in McLean, Virginia.

"In most cases, income did not increase at the pace of average mortgage payments," stated Glassman, who is a member of CNBC's FA Council.

"People are feeling squeezed on all sides," Glassman added.

The higher rates of income-based mortgage denials are attributed not only to elevated mortgage rates but also to soaring home prices, according to Ted Rossman, a senior industry analyst at Bankrate.

"It's really a double whammy, especially for first-time buyers who don't have any equity that they can trade in," he remarked.

The situation is exacerbated by consumers taking on more debt as inflation impacts their budgets.

Furthermore, lenders are scrutinizing applicants' housing expenses, which should constitute no more than 28% of their gross income, as per the 28/36 rule. This rule evaluates how much of an applicant's income is allocated to housing expenses and other debts. Ideally, mortgage payments, property taxes, and insurance should account for less than 28% of gross monthly income, and the total debt, including mortgage, credit card, and auto loan payments, should not exceed 36%.

To assess how much house one can afford before applying for a mortgage, focus on the "three big letters" — DTI, or debt-to-income ratio, suggested CFP Ted Jenkin, CEO of oXYGen Financial in Atlanta.

If your total monthly debt, including auto loans, student loans, and mortgage payments, exceeds 40% of your total income, you face a higher likelihood of being denied. In such cases, you may need to recalibrate your housing expectations, Jenkin advised, emphasizing that DTI ratios are currently above 40% among Hispanic and white applicants, according to the CFPB.

Lenders also consider applicants' credit scores, and the CFPB data indicates that this could be another potential stumbling block. The median credit score for loan refinances now falls below the median credit score for home purchase loan applicants, reversing a recent trend, as reported by the CFPB.

"I think people are feeling squeezed on all sides," commented Rossman. "And from a credit scoring standpoint, too, that's another big part of this whole discussion."