With today’s changing mortgage market, lending requirements have gotten stricter. Bottom line, for those with less-than-perfect credit, it’s harder to get a loan now than it was a year or two ago. Here are some things you can do to improve your attractiveness to mortgage companies and be a smart shopper.

Improve your credit score
Six months or so before you’d like to buy a house, check your credit score. Go to www.annualcreditreport.com and pay the small fee to get your score, along with your free report. If your score is below 700, you may want to improve it before applying for a loan. Check for errors; make your loan and credit card payments on time, every time; pay down your credit cards, but don’t close them.

Increase the size of your down payment
A down payment of at least 10 percent makes you a more attractive borrower to lenders because the lender assumes less risk if you default on the loan. When you’re figuring out what price home you can afford, be sure to take into account how much you can afford to put down. Our home affordability calculator can help you get an idea of what you may be able to afford. http://www.getsmart.com/loan-resources/Mortgage-calculators/What-price-home-can-I-afford.aspx

Lower your debt-to-income ratio.
This refers to the percentage of your gross income you spend on housing and recurring debt. Lenders use this calculation to determine your risk. In general, lenders consider borrowers with more than 36 percent of their income going towards housing and recurring debt to be a higher lending risk.

Shop around.
A good idea in any time, comparison shopping is particularly useful in a tighter mortgage market. Lenders’ policies and lending guidelines are all different, so you may be able to get better terms and pricing simply by talking to more than one lender.

Include a loan contingency in your offer contract.
A loan contingency simply states that your offer to buy the house depends on your ability to obtain financing. In a hot housing market, home buyers will sometimes not include that contingency in order to make their offers more attractive to sellers. It can be a good idea to give yourself an out, just in case your financing falls through.

Want to buy a house but spooked by the current mortgage news? Worried you may not qualify? Don’t panic. Follow these steps to know just where you stand.

Know your credit score
Your credit score is one of the primary indicators of your ability to repay the loan, so it’s a good idea to know it before you apply with a lender. For the most part, if your score is above 760 you can expect to get the best rate a lender has to offer; if your score is below 660 you may have trouble getting approved until you improve your credit (depending on a number of other factors). You can get your free credit report and score at  GetSmart. Or go to http://www.annualcreditreport.com to obtain a copy of your report. (You generally have to pay to obtain your actual score.)

Check affordability
Check affordability and then check again. Most lenders want to make sure your mortgage payment doesn’t exceed 28 percent of your income before taxes, and your total recurring debt (including housing expenses) doesn’t exceed 36 percent.

Do the math
If your current housing expenses and recurring debt – car loan, student loans and other loans – is greater than 36 percent of your gross income, you may have trouble affording a home. And don’t forget to take into account additional expenses involved in home ownership: taxes and insurance, and house and lawn maintenance.

Save for a larger down payment
A 10 percent down payment puts you in a lower risk category than a borrower only putting 5 percent or less down. A 20 percent down payment has the added benefit of saving you the additional expense of private mortgage insurance.

Talk to more than one lender
While lenders often follow the same general guidelines when approving borrowers, there is a lot of variation in the industry, so it’s worthwhile to shop around. Some companies specialize in only certain types of mortgages, whereas others may have a wide range of products. If it starts to feel like a lender is trying to shoehorn you into a particular loan, take your application elsewhere to find a loan that fits your needs.

It’s a good idea to keep an eye on interest rates, no matter where you are in the loan process. Here’s why.

If you haven’t applied for a mortgage yet.
Watching interest rate trends before you apply will help you determine what kind of loan to get. If rates are rising, you may want to stick with a fixed-rate mortgage to lock in a lower rate for the life of a loan. If rates are falling, an adjustable-rate mortgage might be the way to go. If you don’t plan to be in the house for an extended length of time, a hybrid ARM could be an option for you. These loans have a fixed rate for a period of time before converting into an adjustable-rate, usually after 1, 3, 5 or 7 years.

If you have applied, but haven’t closed.
Since it can take up to four weeks from application to closing, watch interest rates closely. If rates are rising, you may want to “lock-in”, and have the lender guarantee that day’s rate for your loan. If rates are falling, you may want to hold off locking in for as long as possible. Some lenders will even allow you to “float down” your rate if you’ve already locked, allowing you to take a lower rate if rates fall. (There may be a fee for this service.)

If you have an adjustable rate mortgage.
If rates are rising and your adjustable-rate mortgage is about to reset, crunch the numbers and see how much your payment is likely to go up. If you are going to feel the pinch, consider refinancing into a fixed rate mortgage.

If you have a fixed rate mortgage.
Just because you got a fixed-rate mortgage doesn’t mean you should fix it and forget it. When interest rates fall, you could save yourself significant amounts on your monthly payment by refinancing. Use our refinance calculator to ensure that the savings exceed the cost to refinance.

Avoid these common pitfalls to make sure you’re prepared to when you’re shopping for a loan.

1. Not checking your credit report. Three or four months before you plan to apply for your mortgage, get a copy of your credit report and check your score. This gives you time to correct any reporting errors and prepares you for what kind of interest rate you can expect.

2. Focusing only on the interest rate. When shopping for a mortgage, it is always a good idea to compare the interest rate. (It’s an even better idea to compare the APR. APR combines a loan’s interest costs with other fees charged by a lender over the life of the loan, and expresses them as a yearly percentage. See our article on the difference between interest rate and APR .) However, the cost of a loan includes much more than the interest rate – you may have to pay discount points to get that great rate, increasing your up front costs; the loan type may be an adjustable-rate mortgage that could lead to rising payments in your future.

3. Focusing only on the monthly payment. Monthly payment is a key component to any mortgage decision, but it is not the only component. Remember to look at things like interest rate and length of the loan, as well as loan type (fixed or adjustable rate). You want to be sure you are not overpaying over the life of the loan. See our article Beyond the Monthly Payment for more.

4. Over borrowing. Your lender may approve you for a loan amount that is larger than you expected. Before you celebrate, sit down with your budget and make sure you can actually afford it. Don’t forget the additional costs of homeownership besides the monthly payment: property taxes and maintenance, for instance.

5. Closing credit accounts. It may seem counter-intuitive, but keep your credit lines open and active in the run up to your home purchase. If you have a lot of debt, it’s good to get that under control before you apply, but don’t cancel your credit cards – decreasing your available credit can actually reduce your credit score.

6. Not planning for closing costs. Finding out how much cash you’ll need at closing can be a shock. When you start looking at mortgages, plan to bring from 2 to 6 percent of the loan amount for closing costs. On a $150,000 mortgage 5 percent is $7,500. It’s a good idea to figure out in advance where that money is going to come from.

How do lenders set mortgage rates?
In the broadest sense, lenders don’t control interest rates. Like almost all prices in a free market economy, mortgage interest rates are determined by the market. It’s a complex process, but in the case of mortgages, the market is made of investors who buy and trade mortgage-backed securities, just like other securities and bonds. These investors are called the “secondary market” in the mortgage industry. Interest rates tend to rise and fall based on demand in the secondary market.

If that’s true, why don’t all lenders offer the same rates?
An interest rate is the basic price of a mortgage (the price the lender charges you to borrow money). This basic price depends on market conditions, but the lender also prices mortgages on a borrower-by-borrower basis depending on risk factors such as how much you are borrowing, how much of a credit risk the lender perceives you to be, whether you are applying for a fixed- or adjustable-rate mortgage. And, just like retail stores, lenders also adjust mortgage rates based on competition with each other and their own costs.

So I should go with the lender advertising the lowest rates?
Not necessarily. Mortgage rates change daily and are based on each individual application, so advertised rates have to be based on a lot of assumptions. And to get your attention, lenders typically use the most favorable assumptions they can: excellent credit and an average loan amount.

Sounds complicated. Can’t I just pick any old lender and be done with it?
You could, but you wouldn’t be doing yourself any favors. The only way to ensure that you are getting a fair deal is to inform yourself on national averages and then compare rates and loan offers from different lenders based on your specific situation. Get started by filling out our easy 2-minute form and get matched with up to four lenders.