How to get a mortgage: Everything you need to know

A real estate agent showing apartment to a smiling couple who have just gotten their first mortgage.Image: A real estate agent showing apartment to a smiling couple who have just gotten their first mortgage.

In a Nutshell

When you apply for a mortgage, lenders review your income, debt, credit, assets, employment history and more to measure your credit risk. The lender will also order a home appraisal to determine the home’s value before lending you money to purchase it. While loan processing times can vary, it generally takes 30 to 60 days to get a mortgage.
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Wondering how to get a mortgage?

Applying for a home loan can be time-consuming and intimidating, but getting funds to buy your dream home can make it all worthwhile.

During the mortgage process, lenders carefully review your finances to determine the likelihood that you’ll repay a home loan. You’ll undergo a credit check to get approved, and lenders review documents like your pay stubs and bank statements. We’ll cover the details of getting a mortgage, so you know what to expect.

What mortgage lenders look for during an application

Here are the factors that affect your mortgage application.

  • Income — Your income is how much you earn from work, self-employment, alimony, child support and more. Lenders review your income to ensure you have enough cash flow to keep up with mortgage payments and home upkeep.
  • Debt-to-income ratio — Your debt-to-income ratio measures how much gross income you earn each month compared to your monthly debt payments. Having a high DTI or a high percentage of your income going to debt each month can signal to lenders that you might have trouble keeping up with home loan payments.
  • Assets — Lenders look at assets like the liquid cash you have in savings and the money you have in investments to see if you have money to draw from to pay the mortgage if you experience a financial emergency.
  • Property type — Whether you’re buying a single-family home, second home, condo or investment property can affect the loan cost and down payment. Interest rates for condos tend to be higher, and second homes or investment properties may require more money down than mortgages for primary residences.
  • Credit — Your credit scores measure your credit risk, or how likely lenders think you are to repay your loan. The credit score required to get a mortgage depends. In the case of FHA loans, you could have credit scores as low as 580 and still qualify to put just 3.5% down. But conventional loans typically require scores in the 600s or higher.
  • Payment history — Payment history is one of the most critical factors that affects your credit scores. Having a record of on-time payments on any on student loans, installment loans and credit cards can help you get approved for a mortgage.
  • Down payment — Your down payment is how much you pay upfront for a mortgage — and having a large down payment could lower your interest rate. The size of down payment you make on a house can depend on the type of mortgage you’re applying for. Generally, loans require 3% to 20% down. But VA loans and USDA loans may require no money down.

Documentation you’ll need for mortgage approval

Here are some examples of financial documents you may need to provide to get home loan approval.

  1. Pay stubs, W-2s or other proof of income — Lenders may check pay stubs, W-2s and child support or alimony documents to verify income sources. You can get pay stubs and W-2s directly from your employer, while several months of bank deposits could show proof of regular child support or alimony payments.
  2. Tax returns — You may need to provide several years of tax returns to show your income, particularly if you’re self-employed and don’t have pay stubs or W-2s. You can get copies of tax returns from your accountant or the tax software you use to file returns.
  3. Bank statements and other assets — Mortgage lenders may request bank and investment statements to show you have enough money in your accounts to make several months of mortgage payments. Lenders may have online application platforms that can connect to your financial accounts, so you don’t have to print out individual statements.
  4. Credit history — As part of the loan application, lenders will check your credit, which usually involves a hard credit inquiry. It’s always a good idea to check your credit before borrowing to see if there are any steps you could take to raise your credit scores. This can lower your interest rate and improve your approval odds.
  5. Gift letters — If a friend or relative is gifting you down payment funds, lenders will likely ask for a gift letter that states the sum given doesn’t have to be paid back. You can ask the lender what the letter should say, but generally, the gift giver should explain that the funds are a gift and where the money is coming from.
  6. Photo ID — Lenders use your government identification to verify your identity. You could provide a driver’s license, passport or state-issued ID.
  7. Renting history — Lenders may want to contact past landlords to get information about your past rental payment history. You can provide rental history by giving lenders phone numbers and names of your past landlords so they can call and do a verification.

Steps for getting a mortgage

Now that we’ve covered what factors affect your mortgage and the documents you’ll need to apply for a home loan, let’s cover the steps for getting a loan from start to finish.

Step 1: Calculate your buying power

A general rule of thumb is to spend no more than 28% of your monthly salary on housing payments. So you can calculate 28% of your household’s income and look for homes at a price point that would keep mortgage payments under that amount. Using a home affordability calculator, you can also calculate your buying power.

Step 2: Get a mortgage preapproval

The actual mortgage process starts with rate shopping and getting loan preapprovals. A preapproval is a conditional offer that estimates how much a lender may be willing to let you borrow. Here are the types of mortgage loans to consider when looking for loans to apply for.

  • Conventional mortgages A conventional loan is a non-government-backed loan that’s geared toward borrowers with minimum credit scores of 620. With higher credit scores, you’re more likely to qualify for better interest rates. Lenders may accept as little as 3% down on a conventional loan as long as you have private mortgage insurance.
  • Government-backed mortgagesThere are a variety of government-backed mortgages, including VA loans (available to veterans, active-duty service members and eligible spouses), USDA loans (for people who live in rural areas), and FHA loans, which offer flexible credit requirements and low down payments.
  • Jumbo mortgagesJumbo loans are large mortgages for homes that exceed loan limits set by Fannie Mae and Freddie Mac. If you live in a high-cost-of-living area or want a larger house, jumbo loans could get you the financing you need.

Step 3: Use your preapproval letter to make offers

Once you have an estimate of the loans you qualify for, you can create a list of houses in your budget, tour them and put in offers with the help of a real estate agent. Putting in multiple offers for different homes could increase your odds of attracting a seller’s attention.

Step 4: Go through loan underwriting

After you get a home offer accepted, you’ll choose a loan offer (if you were preapproved with multiple options), and then the loan goes to underwriting. During underwriting, lenders look closely at your financial documents to verify income, assets and credit. The home will undergo a home inspection, as well as an appraisal during loan processing to determine its market value. Additionally, performing a title search will ensure that the seller has the right to sell the home and that there aren’t liens or other problems with the title.

Step 5: Close on your mortgage and get your keys

If all goes well with the home inspection and appraisal, closing is the last step of the mortgage process. You should get a Closing Disclosure at least three days before your closing appointment that outlines loan terms and closing costs such as appraisal fees, title insurance and prepaid interest purchased to lower your interest rate.

Closing costs generally work out to 2% to 5% of your loan amount and are essential to budget for. In some cases, you can add closing costs to your loan and pay them off over time, or the seller could offer to assist you with closing costs. During closing, you’ll also pay down payment funds, and you should get the house keys.

What’s next?

If you’re interested in buying a house, do a financial checkup to review your credit and the money you have for a down payment. From there, you can look at loan requirements and get the documents you might need for the application process before reaching out to lenders to start checking rates and weighing options.

About the author: Taylor Medine is a freelance writer who’s covered all things personal finance for the past seven years. She enjoys writing financial product reviews and guides on budgeting, saving, repaying debt and building credit. … Read more.