How to Get a Mortgage: A Step-by-Step Guide

Understanding the mortgage process can help you secure better terms, save thousands of dollars over the life of your loan, and avoid costly mistakes.

This guide walks you through everything you need to know about shopping for a mortgage, from improving your credit score to closing on your new home.

Key Takeaways

• Check your credit score and improve your financial standing before applying.
• Get pre-approved to give yourself a competitive edge when house hunting.
• Compare offers from at least three lenders to find the best rates and terms.
• Prepare for closing costs, which range from 2-5% of the loan amount.

Understanding the Mortgage Process

The Mortgage Timeline

The process begins with reviewing your financial situation, followed by shopping for and then choosing a lender, and getting pre-approved. After finding a home and having your offer accepted, you'll formally apply for the mortgage.

1. The mortgage process takes 30-90 days from start to finish.
2. Pre-approval can be completed in 1-3 days.
3. House hunting and choosing a home may take 1-3 months.
4. Underwriting and processing usually require 30-45 days.
5. Closing takes just a few hours.

The lender will verify your financial information through underwriting before giving final approval.

Key Mortgage Professionals

Several professionals help you secure a mortgage:

• Loan officer or mortgage broker: Assists in determining the right mortgage product.
• Real estate agent: Helps find suitable properties.
• Lender's underwriter: Reviews your financial information.
• Appraiser: Assesses the home's value.
• Title company: handles the paperwork and transfers ownership.

Types of Mortgages

There are several types of mortgages available.

• Fixed-rate mortgages: Maintain the same interest rate throughout the loan term.
• Adjustable-rate mortgages (ARMs): Feature rates that can change after an initial fixed period.
• FHA loans: Government-backed loans with lower down payment requirements.
• VA loans: Government-backed loans for veterans with no down payment needed.
• USDA loans: Government-backed loans for eligible rural properties.

How to Improve Your Finances for Mortgage Approval

Check Your Credit Score

Your credit score range significantly impacts your mortgage options and interest rates. For conventional loans, most lenders require a minimum score of 620, with 740 or higher qualifying for the best rates.

FHA loans need at least 580, USDA loans prefer 640+, and VA loans usually require 620 or higher with most lenders.

To improve your credit score, pay down credit card balances to under 30% utilization, keep old accounts open, and dispute any errors on your credit reports.

Manage Debt-to-Income Ratio

Most lenders prefer a debt-to-income (DTI) ratio of 43% or below. This ratio compares your monthly debt payments to your gross monthly income. To improve your DTI ratio, focus on paying down existing debts and consider increasing your income through a better-paying job or side gig.

Down Payment and Reserves

Beyond the down payment, maintain an emergency fund separate from your home purchase savings. Most financial advisors recommend having 3-6 months of monthly expenses saved. Some lenders require 2-6 months of mortgage payments in reserve.

You'll also need to save for closing costs, which range from 2-5% of the loan amount, covering fees for loan origination, appraisal, title insurance, and other services.

How to Choose the Right Mortgage

Fixed-Rate vs. Adjustable-Rate Options

• Fixed-rate mortgages: Offer consistent interest rates and stable payments, making them ideal for long-term homeowners or during periods of rising interest rates.
• Adjustable-rate mortgages: Provide lower initial interest rates for a set period before adjusting based on market conditions. These may be advantageous for short-term homeowners but carry the risk of potentially higher payments later.

Conventional vs. Government-Backed Loans

• Conventional loans: Suit borrowers with stronger credit profiles and larger down payments. While they may require as little as 3% down, putting down 20% helps you avoid private mortgage insurance.
• Government-backed loans: Provide alternatives for buyers with lower credit scores or limited down payment funds. FHA loans require just 3.5% down with a credit score of 580 or higher. VA loans offer qualified veterans 0% down payment options. USDA loans also feature no down payment requirement, but are limited to eligible rural areas.

Select a Loan Term

When choosing between 15-year, 20-year, and 30-year mortgage terms, consider your budget. Longer loan terms result in lower monthly payments, while shorter terms mean higher monthly payments but significant interest savings.

Your ownership timeline also matters. If you're planning to sell within a few years, a 30-year mortgage might make sense due to the lower monthly payments. If you intend to stay long-term, a shorter loan term builds equity faster and saves on total interest paid.

Don't Forget About Rate Shopping

Mortgage rate shopping is also important. Even a small rate difference of 0.25% can save $10,000 or more over the life of a typical mortgage. Obtain quotes from at least three different sources and compare not just interest rates but also APRs, which reflect the total cost, including fees.

Applying for a Mortgage and Closing the Deal

Documentation Requirements

The mortgage application process requires documentation to verify your financial situation, including:

• Identification: Driver's license and Social Security Number
• Income verification: Recent pay stubs, W-2 forms, and tax returns
• Financial statements: Bank statements for all accounts
• Asset documentation: Proof of down payment funds
• Debt information: Statements showing balances of significant debts

Pro tip: Self-employed borrowers need additional documentation, including tax returns and profit/loss statements.

Application Process: Step-by-Step Guide

1. Submit your application: Complete the mortgage application form with personal and financial information.
2. Provide documentation: Gather and submit all required documents for income and asset verification.
3. Credit check: The lender will pull your credit report to review your score and history.
4. Loan processing: A processor organizes your information and prepares it for underwriting.
5. Underwriting review: The underwriter evaluates your application against lending standards.
6. Home appraisal: A professional appraiser determines the property's value.
7. Final approval: After all conditions are met, the lender issues final loan approval.
8. Closing preparation: You'll receive a closing disclosure with final loan terms and costs.

Pre-Approval Benefits

Getting pre-approved gives you a significant advantage in the homebuying process. A pre-approval letter shows sellers you're a serious buyer with verified financing, making your offers more competitive. It also helps you shop within your budget by establishing a clear price range.

Navigating the Underwriting Process

During underwriting, the lender verifies your employment, income, assets, and credit history. They'll also order an appraisal to confirm the home's value.

Common underwriting delays include job changes, opening new credit accounts, and appraisal issues. To avoid these problems, maintain employment stability and refrain from new credit applications during the mortgage process.

Preparing for Closing

To prepare for closing day, review your closing disclosure at least three days before closing. Arrange for a cashier's check or wire transfer to cover your down payment and closing costs. Remember to bring proper identification and any additional requested documents.

Closing costs include appraisal fees, title insurance, and loan origination fees. Some of these mortgage terms are negotiable, particularly loan origination fees and certain third-party services.

Common Mortgage Mistakes to Avoid

Timing and Credit Errors

A common error when getting a home loan is not checking and improving your credit score early enough. Start working on this at least six months before applying.

Changing jobs or taking on new debt during the mortgage process can derail your application, as lenders verify employment and re-check credit before closing.

Budget Miscalculations

Another mistake is maxing out your pre-approved mortgage amount without leaving room for emergencies or other expenses. Just because you qualify for a certain loan amount doesn't mean you should borrow the maximum.

Leave a buffer in your budget for home maintenance, emergencies, and lifestyle expenses.

Not Watching the Market

Staying informed about housing and mortgage market trends is essential. Keep an eye on Federal Reserve interest rates and actions to help anticipate rate changes. Consider rate lock options when you find favorable terms, as rates fluctuate frequently.

Alternative Solutions for Challenges

For borrowers with financial challenges, consider a co-signer to support you financially. Explore down payment assistance programs at the state or local levels, which can provide funds for your down payment or closing costs.

Lease-to-own agreements can also be viable strategies for some buyers with financial challenges.

Conclusion

Securing a mortgage requires preparation, research, and patience. By understanding the process, improving your financial profile, selecting the right loan type, and avoiding common pitfalls, you'll be well-positioned to successfully get a mortgage.

Take time to shop around for lenders, gather documentation early, and maintain financial stability throughout the process. With the right approach, you can find a mortgage that fits your needs and brings you closer to achieving your homeownership goals.

Frequently Asked Questions

1. What do I need to qualify for a mortgage?

Lenders look at your credit score, income, employment history, debt-to-income (DTI) ratio, down payment, and overall financial stability.

3. How much money do I need for a down payment?

It depends on the loan type. Conventional loans may require as little as 3–5%, FHA loans require a minimum of 3.5%, while VA and USDA loans may offer 0% down payment options. A 20% down payment helps avoid private mortgage insurance (PMI).

4. What documents will I need to apply?

Expect to provide pay stubs, W-2s or tax returns, bank statements, identification, employment verification, and details of your debts and assets.