The Complete Guide on How to Get a Mortgage

1. Check Your Credit and Finances

Checking your credit to see where it stands and how it stacks up against typical lender eligibility requirements is a good place to start. Your credit is a major consideration lenders review when determining your mortgage eligibility and interest rate, so you'll want to get a copy of your credit reports and scores to see where your credit currently stands. With a good credit score, you may qualify for a favorable rate and term.

On the other hand, if your credit is on the low side, you may want to take some steps to improve your credit score before applying for a mortgage. When reviewing your reports, keep an eye out for potential issues that could be dragging down your score, and remember, you have the right to dispute information in your reports if you believe it to be inaccurate.

Paying down your revolving debt could also improve your score quickly by lowering your credit utilization rate, which accounts for 30% of your FICO^® Score^☉ , the scoring model used by 90% of top lenders.

Learn more >> How to Improve Your Credit Score

What Mortgage Lenders Consider

Reviewing your financial profile can help you gauge whether you're likely to be approved for a new mortgage. Here are some of the most important factors lenders consider:

• Credit score: The minimum credit score you'll need to qualify for a mortgage may depend on the lender and mortgage type. For example, you may qualify for a conventional loan with a score of 620 or above, but you may still qualify for a government-backed loan with a lower score.
• Income and employment: Mortgage lenders want to see that you have stable and predictable income sufficient enough to support the monthly payments on a new mortgage. Be prepared to back up any income and employment information you enter on your mortgage application with documents like W-2s, tax returns and bank statements.
• DTI ratio: Your debt-to-income ratio (DTI) is the amount of gross monthly income that goes to your debt payments each month. Lenders use this ratio to determine your financial strength. A lower debt ratio may indicate you manage debt well, while a higher ratio could be a red flag that you might struggle with additional debt. Mortgage lenders typically require your DTI to be below 50%, but some lenders set the limit at 43% or even as low as 36%.
• Mortgage reserves: Lenders may be more likely to approve your mortgage if you have adequate assets such as cash in a deposit, retirement or investment account you could quickly sell. Some lenders may require these mortgage reserves if your credit score or DTI doesn't meet their criteria. These assets may assure lenders that you have fast access to cash if you encounter a financial hardship.
• LTV ratio: The loan-to-value (LTV) ratio measures the loan amount compared to the home's value. Lenders generally want to see LTV ratios less than 80%.

Learn more >> How to Build Credit to Buy a House

2. Save for a Down Payment

Another factor mortgage lenders consider is the amount of your down payment. Since your down payment lowers your LTV ratio, a larger one may improve your approval odds and mortgage rate. A 20% down payment is a common goal for borrowers with conventional loans because an amount below that mark means you'll have to pay for private mortgage insurance (PMI).

Tip: Lenders automatically remove PMI once your equity reaches 22%. But you can contact your lender when your equity reaches 20% to request removal.

It's possible—and quite common—to get a mortgage with a down payment lower than 20%. Government-backed mortgages are popular options for affordable loans, with FHA loans requiring as little as 3.5% down, and both USDA and VA loans sometimes requiring no down payment at all.

Some ways that you can save for a down payment include:

• Revising your budget
• Choosing a monthly savings goal
• Reducing your expenses
• Getting a side hustle or part-time job
• Using first-time homebuyer programs or grants

Learn more >> How Much Should I Save for a Down Payment?

3. Figure Out How Much House You Can Afford

Before you begin seriously searching for your dream home, it helps to have a price range in mind that you can afford. Here are some factors to consider to help determine how much house you can afford.

Down Payment and Mortgage Payment

Evaluate how much you expect to put down on a home and how much you can afford to pay each month in mortgage payments. For example, if you have $80,000 saved and want to make a 20% down payment, you might consider viewing homes up to $400,000. If your down payment savings are lower, consider more affordable options such as an FHA loan, which only requires 3.5% down. Run your numbers using a mortgage calculator to get an idea of what your monthly payment might be with different down payment amounts. You'll need to choose a monthly payment amount that works with your budget.

Closing Costs

Be prepared to pay closing costs to qualify and process your loan. These fees, including attorney fees, property appraisals and origination fees, typically range from 2% to 5% of the home's purchase price.

Debt-to-Income Ratio

As mentioned, lenders generally want to verify that no more than 43% of your gross income is used to pay your monthly debts, although some conventional lenders allow for a ratio up to 50%. Before applying for a loan, it's helpful to calculate your DTI to better understand how a new monthly mortgage payment would impact your budget and overall financial health.

Prequalification

Getting prequalified by a lender is an important first step to discover the mortgage loan amount you may qualify to borrow. Keep in mind, a prequalification isn't a guarantee of approval, but it can help give you a clearer picture of what you can afford and the interest rate and terms you might expect.

4. Find the Right Type of Mortgage Loan

Knowing how much money you'll have for a down payment is a key consideration to help you determine what type of mortgage to pursue. Once you have a sense of your budget and finances, you can explore different mortgage types to find the most suitable one for you.

Conventional Mortgage

Conventional home loans are the most common type of mortgage available. The loans often have stricter credit requirements than government-backed loans, usually requiring a minimum credit score of around 620. Lenders generally allow DTIs below 50% and a minimum down payment as low as 3%, but your interest rate could be higher with a smaller down payment.

Remember, a down payment of at least 20% could help you avoid paying private mortgage insurance. Most conventional mortgages are also conforming loans, meaning they "conform" to government limits that meet the guidelines for purchase by Fannie Mae and Freddie Mac.

Jumbo Loan

As the name suggests, jumbo loans are for larger mortgages to finance an expensive home purchase. In contrast to conventional mortgages, jumbo loans are nonconforming because they exceed the maximum loan limits set by the Federal Home Finance Agency (FHFA). As such, these loans are usually intended for borrowers with stronger income and credit.

FHA Loan

FHA loans are mortgages backed by the Federal Housing Administration. They're designed to help first-time homebuyers who may not qualify for a conventional mortgage achieve the dream of homeownership. These home loans have more lenient qualifications, such as minimum credit scores as low as 500 and down payments as low as 3.5%. Unfortunately, you may receive a higher interest rate than with a conventional loan if your credit score or down payment is lower.

Tip: FHA loans have limits that are based on location (low-cost versus high-cost) and property type (single-family versus multi-family).

VA Loan

The U.S. Department of Veteran Affairs offers VA loans to active service members or veterans and eligible family members. These mortgages may be an affordable option if you have stable and predictable income and meet the eligibility requirements. VA loans don't require a down payment or private mortgage insurance. Lenders may prefer a credit score of 670 or higher, though some allow for much lower scores.

USDA Loan

USDA loans are also available with no money down. The U.S. Department of Agriculture offers these loans to lower-income borrowers in qualifying rural areas.

Fixed-Rate vs. Adjustable-Rate Mortgages (ARMs)

You'll also need to consider whether you want a fixed-rate mortgage or an adjustable-rate one and how these could impact your monthly budget. A fixed-interest rate mortgage is a good option if you want an interest rate and monthly payment that never changes for the life of the loan.

By contrast, adjustable-rate mortgages, or ARMs, typically have a lower initial interest rate for the first few years, followed by a "floating" rate that rises and falls with market conditions. While an ARM doesn't offer the predictability of a fixed-rate mortgage, it could be beneficial if you plan on selling your home before the initial interest rate adjusts.

Loan Term

Finally, choose a loan term that aligns with your goals. Home loans typically range from 10 to 30 years, with some extending as long as 40 years, but the most common are a 15- or 30-year mortgage. You might opt for a shorter-term mortgage if you want to pay off your home sooner and save on interest costs over time. Or, you may prefer a longer-term mortgage to lower your monthly payments by spreading out your mortgage balance over a longer period.

5. Choose a Mortgage Lender

Naturally, your primary focus should be on finding lenders offering the most favorable rates and terms, but also consider other factors, such as fees and the lender's reputation.

• Annual percentage rate (APR): The annual percentage rate is the total cost of borrowing, including interest and fees. Shopping around and comparing APRs among several lenders can help you find the best balance of APR, terms and fees.
• Fees: Closing costs for loans vary among lenders and typically range from 2% to 5% of the loan amount, which can amount to thousands of dollars. With good or excellent credit, you may be able to negotiate certain closing costs, such as the origination fee.
• Reputation: Check lender reviews, rating sites and friends' recommendations to make sure the lender you choose is reliable. Remember, you'll depend on your lender to give you accurate preapproval details, and you could potentially work with them for years to come.

Learn more >> How to Shop for a Mortgage

Questions to Ask Mortgage Lenders

Asking the right questions to mortgage lenders could help you determine the best lender to finance your home, such as:

• What types of loans do you offer?
• What loans best fit my financial situation?
• What are your mortgage qualifications?
• What are the closing costs?
• Are some fees, such as your origination fee, negotiable?
• How much house can I qualify for?
• How much will I need for a down payment?

6. Get Your Preapproval Letter

Many of the preceding questions can be answered with a preapproval letter. This document states the loan amount your lender believes you may qualify for based on the information you provide them. It also details what interest rate, fees and closing costs to expect. Your preapproval letter shows sellers you're a serious buyer who will likely qualify for a loan up to the preapproved amount.

Your lender will want to verify the claims you make on your preapproval application. It's important to be as forthcoming and truthful as possible to get an accurate preapproval amount.

Here are the documents your lender will request:

• Proof of identity: You'll need government-issued identification, such as a driver's license or passport, and your Social Security card.
• Proof of income: You'll need pay stubs for the past two months and the previous two years' tax returns, W-2s or 1099s and other documents to verify income. Note that self-employed applicants may face stricter requirements for proof of income.
• Proof of assets: Provide bank and investment account statements, as well as gift letters if you're using money from family members.
• Current debts: Collect credit card, loan and rent or mortgage statements to show your total debt obligations and monthly payment amounts.

The Consumer Financial Protection Bureau recommends comparing loan estimates from at least three lenders using similar loan terms so you're comparing apples to apples. Rates vary from lender to lender so comparing several lenders can help you find the best rate.

Lenders will do a hard credit check when evaluating your preapproval application, and this can have a slightly negative effect on your credit score. However, if you complete your preapprovals within two weeks, credit scoring models will treat these inquiries as a single credit check on your credit report, reducing the impact on your score.

Keep in mind, getting preapproval for a mortgage isn't the same as receiving final approval. Once you come to an agreement with the seller, your mortgage lender will formally check your supporting documents and underwrite your loan. If possible, avoid changing jobs, opening new credit accounts or making any other major life changes between the time of preapproval and closing since this could affect your mortgage approval.

7. Find a House and Make an Offer

With your preapproval letter in hand, you can begin your serious quest to find a home that fits your budget. A real estate agent can line up properties to view and may even have knowledge of homes that will soon be available but haven't yet hit the market.

Once you find your ideal home, your agent can submit an offer on your behalf. In a competitive market, you may need to offer more than the seller's asking price to secure a deal. It may be customary in your market to include an earnest money deposit with your offer, typically 1% to 3% of the offer price. Generally, if the seller rejects your offer, the earnest money check is returned to you. If the seller accepts your offer, the funds may be applied to your down payment during escrow, but check with your agent, contract and local laws to be certain.

8. Submit Your Mortgage Application

Once you reach an agreement with the seller, it's time to submit your loan application to your lender. Remember to have the supporting documents mentioned above handy and be ready to submit them at your lender's request. Responding promptly to your lender's requests helps keep the process running smoothly and prevents time-consuming delays.

9. Wait Out the Underwriting Process

While some lenders can approve your loan in as few as 15 days, the underwriting process usually takes one or two months to complete. During this period, your lender will order an appraisal and perform a title search to make sure the title can be legally transferred.

While your lender is working on your loan, you'll have plenty of due diligence to do, including getting an inspection of the property. Depending on your contract, you may be able to back out of the deal if unexpected conditions, costly repairs or other contingencies are discovered during this period.

Use this time to secure homeowners insurance, which most lenders require as a condition of loan approval. Your lender may require you to submit proof of insurance three to 15 days before closing.

10. Prepare for Closing

Your loan office should help you navigate the closing process and ask for documents as needed. They'll let you know what closing fees to pay. For example, you'll probably need to prepay some of your property taxes, homeowners insurance and potentially mortgage insurance. Your lender will keep these fees in an escrow account and make these payments when they are due.

Make sure you have funds on hand for closing costs, such as:

• Appraisal fee: According to HomeAdvisor, homebuyers pay $357 on average for a single-family home appraisal.
• Origination fee: These fees are paid to the lender to cover the cost of processing your mortgage loan. Origination fees typically range from 0.5% to 1.5% of the loan amount.
• Title search fee: A title search is needed to make sure the property title is clear of liens or any issues that could prevent the transfer of the property. Fees can range from $75 to $200.
• Title insurance: Lenders typically require you to purchase title insurance to cover potential complications or disputes that come up during the transfer of the title. The average cost of a title insurance policy is around $1,000, but you could pay more or less depending on your state and the home's purchase price.
• Recording fees: Your county will charge a fee—from $20 to $250—to record the deed on your new property and create a public record.

Near the end of the escrow period, your lender will run a final credit check to make sure there haven't been any significant changes. They'll also provide you with the closing disclosure, which breaks down the terms of the loan, including fees and closing costs. Make sure you read and understand these documents before signing them.

On closing day, you'll do a final walk-through of the home and submit a cashier's check for your down payment. Once you sign all the closing documents, the ownership deed on the property can officially transfer to you.

Learn more >> What You Need to Know About Closing Costs

11. Move Into Your New Home

Accepting the keys to your new home is a momentous occasion, marking a major milestone and a cause for celebration. You'll need to make moving plans, transfer utilities and update your address on your accounts. These are minor inconveniences compared to the satisfaction and rewards that come with homeownership.

So there you have it: 11 steps to get a mortgage and purchase a home. If you're ready to finance your dream home, start by checking out current mortgage rates and offers from reputable lenders.

Monitor Your Credit When Getting a Mortgage

Getting a mortgage is an important step in the homebuying process. Take the time to shop around, compare lending options and thoroughly review your loan terms.

It's important to protect your credit during the mortgage process. Experian's free credit monitoring can give you access to your Experian credit report and FICO^® Score and alert you in real time to any changes that could derail your mortgage approval.