I would just have to borrow extra if I were to pay 20% down, which would prevent me from paying the mortgage insurance.

That means a suit was brought and successfully prosecuted.Insurance does NOT prevent lawsuits!

How do you prevent at the trustee sale of the 2nd bidding up what they will pay.

It prevents these and other issues.

I do not charge them or collect the money so I'm out of the equation.My 2 cents Unfortunately, the law prevents you from charging any fees during the application process, not just the lease itself.  

If you do, then the first one that gets their hold deposit in gets it.I think it helps do two things. 1) Creates a sense of urgency for them to make a decision.2) Helps prevent me from losing good tenants because I am able to act fast.I don't like the idea of collecting applications for a period of time.The risk there is that the good ones might be accepted somewhere else.

In contrast, large rips or indelible stains justify a deduction from the tenant's security deposit for repairing the carpet or drapes, or replacing them if that is reasonably necessary.One common method of calculating the deduction for replacement prorates the total cost of replacement so that the tenant pays only for the remaining useful life of the item that the tenant has damaged or destroyed.

I was at first frustrated that a wife asked me what color I was going to stain the deck.

They also have had the precedent to prevent rentals in the neighborhood.  

You learn this after the first law suit and documenting everything and being totally honest will not prevent all lawsuits, unfortunately.