Why You Should Think Twice Before Applying for a Mortgage in These 3 States

By Nathan Hamilton Markets Fool.com

There are a number of things for potential new homeowners to be aware of when it comes to mortgages -- everything from learning how tosecure a low mortgage rate to getting pre-approved to improving your credit score. Doing your homework is crucial when preparing to take on a mortgage.

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With that in mind, Motley Fool analysts Kristine Harjes and Nathan Hamilton talk in the video below about why potential new homeowners in some states may want to take some extra steps to ensure their financial houses are in order before applying for a mortgage.

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Kristine Harjes: When you're reading advice about applying for mortgages, one thing that you don't hear too often is information that has to do with the specific state in which you're applying. But realizing the different rules and the different normalcies for each separate state can be very important to making the most informed decision.

Nathan Hamilton: Sure. We came across some research from our friends at NerdWallet looking at mortgage application approval rates, and just telling, OK, how many people applied for a mortgage application? How many people were actually funded and closed on a home? You look at the numbers, and you start to see some trends, which we'll get into. If you look at three of the states that are on the lower end of the spectrum, these aren't the three lowest, but they are some of the lower ones out there. You've got Mississippi, 85.6% approval; Kentucky, 86%; New Jersey just edging out Kentucky at 86.1%.

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Harjes: That's kind of interesting to hear those numbers if you haven't looked at this data before, because those sound relatively high.

Hamilton: Yeah, they're high numbers.

Harjes: They actually are relatively low. One of the reasons for this is that, in those three states, people, in general, have below average credit scores.

Hamilton: Yeah, they tend to be. If you look at the average credit scores, Mississippi, we've got it written down here, 668, Kentucky, 680, New Jersey, sorry, falling behind Kentucky here, 676.

Harjes: That's my home state, so that hurts. It also hurts the people that are in these states that do have credit scores that are below average, because your credit score is so, so important in getting the best rate possible for you. It can mean the difference in a whole percentage point-and-a-half, for even just excellent versus poor credit. That can save you hundreds of thousands in savings.

Hamilton: Yeah, I mean if you think about it, 1-1/2 percentage points, you look at it at face value and say, "Eh, that's really not that much of a difference."

Harjes: That doesn't sound like a ton.

Hamilton: That's not too bad, I can deal with that. But if you extend that over a 30-year mortgage, 12 payments per month, compounding that interest not in your favor, to somebody else you're paying, it adds up significantly. And on larger mortgages, when you're looking at $400,000-plus homes, that is hundreds of thousands of dollars in savings for 1-1/2 percentage points.

Harjes: Exactly, and when you think about how nitpicky people can be about how they spend their money on little purchases, you know, maybe you're going to argue that appetizer that was on happy hour should have been $1 cheaper that it really was. That means so little relative to what a percentage point does on your mortgage.

Hamilton: Put it in context.

Harjes: Exactly, because it's such a huge purchase. Knowing that, can you share with us a tip? What can people do to try to improve their credit scores and get a better percentage rate on their mortgage?

Hamilton: Yeah, so if you're in one of these states, or you have a lower credit score and you're worried about being approved for a mortgage, there are some specific steps. One of them, which can help increase your credit score in the near term, is looking at paying down your credit card debt before the statement date. I say statement date, not due date, and that's important to put into context, because what happens is, on the statement date, your credit card issuer reports your credit balances to the credit bureaus, who calculate your FICO score.

Now, I know that sounds a little bit complex, but what it means for you is the lower your credit balance is versus what you have available, the better your credit score is going to be. As you pay off your debt balances before that statement date and you pay it down, lower debt levels are going to be reported to the credit bureaus, your FICO score is going to improve, and it's a pretty near-term, pretty meaningful impact because 30% of your FICO score is based upon your credit utilization ratio.

Harjes: Here at the Motley Fool, we have been compiling tips just like that to help you boost your credit score. If you're interested in seeing some more of them, check out fool.com/mortgages, where there is a ton of great information. There are calculators, and you can also get access to highly rated lenders that have low rates, and in particular, you might be interested in our free guide called "5 Tips to Increase Your Credit Score Over 800."

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