9 Mortgage Application Tips: Would You Give Yourself a Mortgage Loan?

By: Jilly Pretzel

Applying for a mortgage can be nerve-wracking. Follow these mortgage application tips, and you'll have the keys to your dream home in no time!

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1. Check Your Credit Score

Before you even think about applying for a mortgage, the first thing you need to do is get to know your credit score, and hopefully, bump it up.

According to the Home Loan Learning Center, many lenders require a minimum score of 680 (or 620 for an FHA loan) and can deny anyone who falls below that. Though you probably can find a loan even with a 600 or 610 credit score, your interest rates will be likely be higher than you’d like.

So, it’s important that you check your credit report right away. It’s easy (and free) to get a copy of your report at annualcreditreport.com. Check if there are any errors or fraudulent activity and get those fixed right away.

If you’re free of errors but your credit score still isn’t sky high, now is the time to start taking steps to improve it.

Close out any unused credit cards or loans, then pay off any credit cards you can. It will take some time to make those changes, and for these changes to be reflected in your credit score but waiting for that higher number is well worth the wait.

2. Save for a Bigger Down Payment

Sometimes lenders will reject a loan because the applicant has no money down. Lenders may have approved a zero-down mortgage loan in the past, but these days, lenders are more cautious.

Borrowers need to remember that lenders are taking a risk when they lend money and want to make sure they’re going to get their money back. If you can ease their mind with a high credit score—and a larger down payment—they’ll be more likely to not only approve your loan but also give you a better rate.

Different lenders have different requirements, but usually you’ll need at least a 3.5 percent down payment in order to qualify. Still, the higher your down payment, the lower your rates will likely be, and the better you’ll be in the long run.

If you’re able, save up until you can get to that 20 percent mark. If you have less than a 20 percent down payment, lenders will require mortgage insurance (PMI), which will cost you an extra 0.35 percent-1.0 percent annually. That’s extra money out of your pocket you could be saving.

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Borrowers need to remember that lenders are taking a risk when they lend money and want to make sure they’re going to get their money back.

3. Save Money for Your Mortgage

While you might feel like you’re putting everything towards your down payment, you’ll want to show off some cash in your savings too. Lenders want to see that you have the money to pay your first month’s - and maybe even your second month’s -mortgage.

Lenders want to know that you have a good financial reserve and you’re not going to be missing payments any time soon.

Plus, it doesn’t hurt to give yourself a little buffer when buying a house. In all the excitement of getting approved for a loan and finding a home, some buyers forget that getting a mortgage requires home inspections, home appraisals, application fees, closing costs, and other expenses.

Closing costs alone will usually cost you 3 percent to 5 percent of the mortgage balance, which can mean another huge expense before you seal the deal.

4. Shop Around

Whether you’ve got that great credit score and that big down payment—or not, know that there will sometimes be some wiggle room when it comes to finding a lender. Know that mortgage interest rates and closing costs are not one-size-fits-all and just because you get one rate from one lender, doesn’t mean you’ll get the same offer elsewhere.

Even if you find a lender you like and trust, you can use offers from other lenders to negotiate a smaller rate. Some recommend getting at least three or four offers before choosing one, but an easy way to see many different offers at once is to go to bankrate.com. There, you can plug in your credit score and down payment to compare rates easily.

5. Get Pre-Approved

It might seem backwards to apply for a loan before finding a house you like but getting pre-approved will certainly save you lots of stress in the home-buying process.

For one thing, it lets you know up front how much you can spend on your new home, so you don’t have to risk falling in love with a house you can’t afford. Plus, it’ll help you put in a speedy offer when you finally do find that dream home.

While those who aren’t pre-approved are scrambling to get their paperwork in order, you’ll be able to submit an offer right away.

To get pre-approved, contact a mortgage lender and submit your financial and personal information. The lender will respond with what you can afford and your interest rates, and that pre-approval letter will go in your records. The loan should be available just as soon as someone accepts your bid.

Perhaps you do everything right: you kick up your credit score, save for that hefty own payment, stock up for that impressive savings account, then apply for pre-approval from a lender.

With all this great stuff going for you, your lender will likely not only approve your request for a loan but might approve you for a larger mortgage than you expect.

That might sound great, at first, but remember that just because the lender says you can afford a mansion doesn’t mean you should buy one. Lenders can’t see the big picture when they approve your loan. They see your credit score, but they don’t see your plans to go on vacation next year. They see your down payment, but they don’t see how much you’re going to pay for your kids’ college.

Don’t let the excitement of getting pre-approved let you go overboard: buying something you won’t be able to afford in the long run. Buy smart and find the house that’s perfect for you (and your wallet).

Lenders can’t see the big picture when they approve your loan. They see your credit score, but they don’t see your plans to go on vacation next year.

7. Don't Make Any Big Changes

Your lender wants to know that you’re consistent and your paycheck is dependable. So, don’t do anything like change careers in the middle of your application process.

If your lender sees you taking a lower-paying position or quitting your job to start a business, they could decide to reject your loan.

Likewise, you should avoid taking on new debt while applying for a loan. Lenders re-check your credit before closing, so it’s important to keep that score high.

To be safe, avoid making big charges on your credit card, getting a new car, or co-signing a loan—at least until after you move in.

8. Go for the Fixed Mortgage

You’ve probably heard some talk about choosing between a fixed mortgage rate and an adjustable-rate mortgage (ARMs). The fixed rate will usually be a bit higher, but as its name suggests, the rate won’t ever go up.

Meanwhile, the ARM usually starts much lower, but you should expect it to change over time. ARMs may go up and down, meaning you risk paying a higher rate, but there’s also a chance of the rate going down which would mean savings for the homeowner.

But the truth is, that rate is probably going to go up way more than it will ever dip down. It might even go up a percent a year, and after being in your mortgage for just a few years you might see your rate pop up from a 3.8 percent to a 7.2 percent when you could have had the 4.3 percent fixed from the beginning.

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9. Don’t Let Yourself Feel Pressured

Know that buying a house is a large undertaking that not everyone is ready for. It’s your realtor’s job to try to get you to buy a house and she or he will try to sway you with seemingly once-in-a-lifetime rates and fabulous houses that may seem like your dream home. Don’t let yourself feel pressured into buying if you feel you’re not ready.

It’s okay if you realize this might not be the right time for you. It’s better to pump the brakes than to find yourself in over your head with loads of debt and a mortgage you can’t pay.

Remember that there will be other opportunities and other dream homes. Wait for your credit score to improve, let your savings build up for another six months or a year, and watch the market. Listen to your gut and don’t be afraid to wait for the perfect time.