How to Get a Mortgage: A Step Guide (2024)

Buying a home is a massive step in a person's life, but for most people, it wouldn’t be possible without a mortgage. Unfortunately, getting one can be a complicated and confusing process. Here are the steps you’ll need to take to obtain a mortgage along with answers to some questions that might come up along the way.

Getting a mortgage in 7 steps

Found your dream home? It’s time to start the process of getting a mortgage. Here is a step-by-step guide.

1. Understand your finances

Before you apply for a mortgage, you need to examine your finances and understand if purchasing a home is the right decision at the moment. Start by checking your credit score. Most credit card issuers provide customers with their credit score, or you can use a website such as Credit Karma.

Your score should be at least 700 to qualify for the best mortgage rates. Although you can still get approved for a mortgage with a lower credit score, your interest rate will almost certainly be higher.

You also need to check your credit report. This allows you to spot any inaccuracies that could cause a problem while applying for a mortgage. You can check it for free through AnnualCreditReport.com. If you spot any errors, make sure to contact the credit bureau immediately.

2. Determine the type of mortgage you want

There are several types of mortgages to choose from. Consider your financial situation and needs when determining which product is best for you.

Conventional vs. government-backed loan

• Conventional loan. This type of loan works for someone with a strong credit score. Because the federal government doesn’t back it, there are stricter lending requirements.
• FHA loan. Backed by the Federal Housing Administration (FHA), an FHA loan is ideal for first-time homebuyers because the credit score requirements are more lenient and the minimum down payment is only 3.5%. The downside is that all FHA loans require private mortgage insurance.
• Jumbo loan. For homes that are too expensive for a conventional conforming loan. Jumbo loans are often used to purchase homes in high-cost-of-living areas.
• VA loan. Backed by the Department of Veterans Affairs, a VA loan is for active military members, veterans, and their spouses. It allows you to purchase a home without a down payment.
• USDA loan. Backed by the United States Department of Agriculture, a USDA loan allows lower-income individuals to purchase homes in rural areas without a down payment.

Fixed or adjustable rate

• Fixed rate. With a fixed-rate mortgage, your interest rate is locked in at the beginning and won’t change throughout the life of the loan. The loan length will depend on the lender, but it can come with terms of 10, 15, 20, or 30 years.
• Adjustable rate. Adjustable-rate (ARM) mortgages are attractive because they start with a lower fixed rate for a shorter time and become variable.

3. Shop around for mortgage lenders

Once you know what type of mortgage loan best fits your situation, it’s time to find a mortgage lender. Getting quotes from multiple lenders will help to ensure you get the best deal.

One thing to note is that each lender will perform a hard inquiry, also called a “pull,” on your credit, which will have a temporary effect on your credit score. However, all credit pulls from mortgage lenders done within a 45-day period will only show as a single one.

When comparing quotes, look for a lender specializing in the type of mortgage you want. If you’re in the military, start with a lender focusing on VA loans. If you’re looking for a simple conventional loan, consider most lenders available in your area.

When comparing rates among lenders, look at both the interest rate and the closing costs. Lenders frequently publish rates that include points, which are a way to buy down the interest rate. However, it will cause the closing costs to be higher.

4. Get preapproved

Once you’ve found your lender, it’s time to get preapproved. This is a process in which the lender will assess your finances to ensure you qualify for a mortgage and for how much.

Mortgage preapprovals are important if you purchase a home in a hot market. Providing the seller with your preapproval letter says you’re submitting a strong offer without financing issues. However, preapproval does not mean you’re actually approved or guaranteed to be. Once you make an offer on a home, you still must go through the full underwriting process before you can be approved for a mortgage.

5. Submit an application

Once you’ve found the home you want to purchase and your offer has been approved, submit a mortgage application. These days this is typically done online, but if you’re working with a loan officer in your area, you can choose to do it in person.

You must submit several documents to help the underwriters assess your qualifications. These can include the following:

• Government-issued ID and Social Security number.
• W-2s from the past two years.
• 1099s if you’re self-employed.
• Tax returns from the past two years.
• Pay stubs from the past 30 days.
• Recent bank statements.
• Recent investment statements.
• Documentation of any recent out-of-the-ordinary bank deposits.
• A letter stating that part of your down payment is from a gift.

A lender may also require other documents depending on the loan for which you’re applying.

6. Endure the underwriting process

Once you’ve submitted your application, the lender will begin underwriting. This tends to be the most stressful time for many buyers. Even though you’ve been preapproved, the underwriting team can change its mind after examining your finances more thoroughly.

As the lender reviews the documentation you provided, it will consider several important factors, including your debt-to-income ratio, credit and job history, and current debts. While you’re going through the underwriting process, it’s important to avoid making any major financial changes. Don’t buy a new car, apply for a new credit card, or take on any other major debt.

Expect the lender to schedule a home appraisal to determine the current market value of the home. Ideally, the appraisal should be in the ballpark for the amount you offered to pay. If the home appraises for less than that, you may need to pay cash at closing to cover the difference.

7. Close on your new home

After approval comes the closing, during which you pay closing costs and sign all the documents associated with your loan. Only then will you receive the keys to your new home.

Factors considered by mortgage lenders

When applying for a mortgage, the lender will consider several things in making an approval decision.

Income and job history

Your income and job history will be important to a lender as it assesses your qualifications. Seeing that you have a steady income and haven’t been a job hopper will make it feel more comfortable lending you money.

When a lender considers income, it looks at all sources. This includes your full-time job but also any of the following:

• Alimony and child support payments.
• Income from side hustles.
• Rental or property income.
• Commissions.
• Military benefits.
• Investment income.
• Social Security benefits.

Credit score

Your credit score helps a lender to know how responsible you are financially. The higher your score, the more confident it will be that you can make your monthly mortgage payments. If you have a lower credit score, you might be more likely to fall behind on your payments.

Most lenders will require a credit score of at least 620. However, FHA loans are typically available to someone with a lower score if they have a larger down payment. Just remember that the higher your credit score, the lower the interest rate on your mortgage is likely to be.

Debt-to-income (DTI) ratio

A lender wants to know that you have enough money coming in each month to be able to cover each of your bills. A marker of this is your DTI ratio, which is the total amount of your monthly debts compared with your monthly income.

To determine your DTI ratio, total how much you pay each month toward fixed payment debts, such as credit cards, auto loans, insurance, etc., then divide the total by your pretax household income. Ideally, your DTI should be no more than 49%, but 35% or lower is even better. At 50% or higher, you’ll find it hard to get a mortgage. You’ll certainly face a high interest rate and require a larger down payment if you are approved. In short, the lower your DTI, the better you’ll look to the lender.

Assets

Mortgage lenders also want to know that you can continue paying your mortgage if you have a financial emergency, such as a job loss or a large medical expense. As such, they will want to view the following accounts:

• Checking.
• Savings.
• Investment.
• IRA and/or 401(k).

Property type

The use of the property will also be important to the lender. If this is a second home or an investment property, the lender will likely want a higher credit score, a larger down payment, and fewer debts. This is because defaulting on the mortgage for a secondary property is more likely than on your primary residence.

Documents required to get a mortgage

When applying for a mortgage, there are several documents you’re required to give to the lender.

Proof of income

A lender will want to see pay stubs from the past 30 days and W-2s from the past two years. If you’re self-employed, you must provide 1099s and tax returns for the past two years.

Credit documentation

A lender will pull your credit report to assess you as a borrower. You must provide your Social Security number and permission to pull your credit.

Proof of assets and liabilities

Your paycheck isn’t the only thing a lender will care about seeing. It will also want to know about other assets, such as investment accounts or an investment property, and any current debts, whether from student loans, credit cards, or personal loans.

How to prequalify for a mortgage

Getting pre-qualified is something you can do early in the process. This will help you understand how much you can afford. You’ll be asked to provide the city and state where you’re looking to purchase the home, along with your estimated purchase price and down payment.

A lender typically performs a soft credit check for prequalification, which won’t affect your credit score. This will provide the lender with the basic information on your credit report, allowing it to set your loan amount and interest rate.

TIME Stamp: While not everyone can qualify for a mortgage, there are many ways of getting one

Buying a home is an exciting but stressful time for many people. Understanding how the mortgage process works and what you should expect will hopefully make the experience much smoother. Even if your financial situation is less than ideal, there may be a way forward for you.

Frequently asked questions (FAQs)

What income is required to get a mortgage?

This depends on the amount you want to borrow and your other debts. A lender will pay close attention to your DTI and likely won’t approve you for a loan that increases your DTI ratio above 45%.

Where can I get a mortgage?

You can get a mortgage through a bank, a credit union, or an online lender. You can also work through a mortgage broker. Below are a few of the best mortgage lenders.

Rocket Mortgage

‌Rocket Mortgage is an industry giant for good reason. Its ONE+ product allows you to purchase a home with as little as 1% down. Plus, it will provide you with an extra 2% down payment. However, there are income requirements you must meet.

If you would prefer to get a more standard loan where you can make a larger down payment, Rocket Mortgage offers conventional, ARM, FHA, VA, and jumbo loans.

Warp Speed Mortgage

If you’re looking for a mortgage lender with many different loan options available and the ability to close fast, Warp Speed Mortgage is a great fit. Not only will you have access to conventional, FHA, VA, USDA, and jumbo loans, but Warp Speed Mortgage also provides land loans, ideal if you’re planning to build a home.

Warp Speed Mortgage stands out from other lenders because of its fast closing. It guarantees that your loan will close within 14 days. If the process takes longer, the company will provide you with a $2,000 line item credit at closing.

Better.com

Not knowing if you will be approved for a mortgage can make the process stressful. Underwriting can take weeks with many lenders, making things even worse.

Better.com makes the process easier with its One Day Mortgage, which allows you to upload your financial documents and get a commitment letter within 24 hours. This means you’ll have the peace of mind of knowing after only one day that your loan won’t fall through. You can also access conventional, FHA, and jumbo loans at Better.com.

Which loan is best for first-time homebuyers?

If you have good credit, a conventional loan is the best option. It allows you to use as little as 3% down but comes with stricter requirements than other mortgages: You’ll need a low DTI and high credit score to qualify. If your credit score is on the low side, you might be better off with an FHA loan. However, you’ll be required to take out private mortgage insurance.