4 Signs You Should Wait to Apply for a Mortgage

by Maurie Backman | Oct. 19, 2020

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A For Sale sign in front of a sunny green lawn and white two-story home.

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Don't start filling out mortgage applications yet if these circumstances apply to you.

Mortgage rates have fallen to historic lows. Thousands of potential buyers are trying to jump on that opportunity by applying for a home loan. But if you're thinking of getting a mortgage, you need to make sure you're ready for the commitment. It could be better to delay your application if any of the below circumstances apply:

1. Your credit score isn't great

Those fantastic mortgage rates we just talked about? You won't snag them if your credit is poor or mediocre. In fact, if that's the case, you may not get a mortgage at all.

If you want to secure a competitive mortgage rate, you'll generally need a credit score in the mid-700s or even higher. If you're not there yet, it pays to hold off on applying for a mortgage. Work on boosting your credit score instead. Start by paying incoming bills on time, knocking out a chunk of existing debt, and making sure your credit reports don't contain errors that are working against you. Right now, you're entitled to a free copy of your credit report every week -- there's no excuse for slacking off.

2. You have a lot of debt

If you're loaded with debt -- especially the unhealthy kind, like credit card debt -- the last thing you need on your plate is more debt. Yes, that includes a mortgage. You're better off paying down some existing debt first.

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Why? The amount of existing debt you have is a factor mortgage lenders consider when deciding whether to approve you for a home loan. It also influences the interest rate on your mortgage. The less debt you have, the stronger a candidate you'll be.

3. You don't have much of a down payment

Yes, it's possible to get approved for a mortgage even if you don't have a 20% down payment saved. But if you don't put down 20%, you'll be hit with private mortgage insurance -- a costly premium added to your monthly mortgage payment.

That's not all. If you fail to make a 20% down payment, it will take much longer to build equity in your home. You'll increase your risk of becoming underwater on your mortgage. That scenario occurs when your home value drops and your outstanding home loan balance exceeds your property's value. Being underwater on a mortgage is risky, because if your circumstances change and you need to sell your home quickly, you may not be able to. Making a higher down payment could help prevent that situation from arising.

4. You haven't started searching for a home yet

When you lock in a mortgage rate, that rate lock doesn't last forever. Your lender might let you lock in your rate for 30 days, but beyond that point, you'll generally pay a fee to extend it (though some lenders will give you an initial 60-day rate lock). It's for this reason that you shouldn't apply for a mortgage until you're close to making an offer on a home. It could take weeks just to find a place you like, and then another 30 days or more to close on that property -- by which time your rate could expire.

A better bet: Identify your target neighborhood to buy in, price out homes in that area, and make a list of the ones with potential before starting the mortgage application process. Remember, too, that you can always get pre-approved for a mortgage as you embark on your home search. That won't guarantee your rate, but it will give you an idea of how much you can borrow. And if you decide to make an offer, sellers will take it more seriously.

Even if you're eager to have a mortgage, you don't want to rush into it. If the above scenarios apply to you, you may want to sit tight and hold off on getting a home loan. Doing so could actually make more financial sense for you.

Today's Best Mortgage Rates

Chances are, mortgage rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new purchase. Click here to get started by scanning the market for your best rate.

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