How to get a mortgage

How to qualify for a new mortgage

Lenders look at four main things before approving a mortgage application: income, credit, debt and down payment.

• Income: Lenders want to see that you have proof of consistent income and a steady employment history.
• Credit score: Most loans require a minimum credit score between 580 and 620. A few factors determine your mortgage rate, but your credit score is a big one — you’ll get the best rates with a score above 760.
• Debt-to-income ratio: Your debt-to-income (DTI) ratio is a percentage that represents how much of your monthly income goes toward paying existing debts. In general, lenders like to see a DTI of 36% or lower.
• Down payment: The required down payment will depend on your lender and the type of loan you receive. Some loans, like a VA loan, do not require a down payment.

» LEARN MORE: How does a mortgage work?

Documents needed to get a mortgage

The underwriting process for a mortgage requires a lot of paperwork. Expect to go back and forth several times with the underwriter to get them all of the financial documents needed to successfully get your loan to funding. Here are some of the documents you will need:

• Valid driver's license
• Employment and income verification, including recent pay stubs
• Two of your most recent bank statements (all accounts, all pages)
• List of assets (including retirement accounts)
• Documentation of debts
• Documentation of any financial gifts you will receive to help you purchase the home
• Two years of W-2s
• Two years of tax returns

» READ MORE: Interest rates and how they work

How to get a mortgage step by step

The first step of how to get a mortgage is auditing your financial situation. How much house you can afford depends on your finances and the mortgage’s upfront and ongoing costs. Often, the total cost ends up higher than you think.

When considering buying a home, you should:

1. Improve your credit score
2. Figure out how much house you can afford
3. Consider your home loan options
4. Find the right mortgage lender
5. Find a real estate agent
6. Get your preapproval letter
7. Make an offer on a house
8. Update documentation
9. Prepare for closing day

1. Improve your credit score

First, go over your credit report for accuracy and check your credit score. Ideally, you want to apply for a home with good to excellent credit — a score of 670 and up.

If you’re not quite there, consider ways to build your credit (or, if you’ve had a few hiccups, fix it) before applying for a home loan. Even if you have enough cash on hand for the down payment, you might not get approved if you have bad credit or tax problems.

2. Figure out how much house you can afford

From July 2021 to June 2022, homebuyers put down a median down payment of 14%, according to an National Association of Realtors survey.

At the beginning of the mortgage disclosure process, borrowers also have to submit an authorization for verification of employment history. Since the start of COVID, with so many people getting furloughed early on in the pandemic, lenders have taken the income verification step quite seriously. You can’t always count bonuses as income, and it’s more difficult to get approved if you’re self-employed.

Take a look at your savings account, and think about how much you can put down. Keep in mind that if you get a conventional loan and put less than 20% down, you will have to pay for private mortgage insurance.

Don’t forget to factor in origination fees, closing costs, the home appraisal and inspections (due at closing). As you calculate your mortgage budget, include monthly payments, home insurance and any recurring homeowner association (HOA) fees.

3. Consider your home loan options

How you get a mortgage depends a lot on the type of loan you can qualify for. The main types of home loans are government-backed and conventional loans. Jumbo mortgages are a type of conventional loan. Your finances and personal situation will likely determine the loan option that’s best for you.

Government-backed mortgages are guaranteed by government agencies such as the Federal Housing Administration (popular with first-time homebuyers), the U.S. Department of Agriculture (great for those purchasing in rural areas) and the U.S. Department of Veterans Affairs (for former and active members of the military).

Conventional mortgages are not part of a government program. You generally need a credit score above 620 and a down payment typically between 3% and 20% to qualify.

Jumbo mortgages, which are nonconforming loans, are for home loans above the maximum loan limit set by the government for purchase by government-sponsored enterprises (Fannie Mae and Freddie Mac). To qualify, you need to meet stricter guidelines, such as having a higher credit score.

» MORE: Conventional mortgage vs. FHA

Additional factors to help you decide the right type of mortgage include:

• Loan term: The term of the loan is how long you have to pay it off. Most homebuyers get a 15- or 30-year mortgage, but some lenders offer other terms. A longer loan term generally gives you lower monthly payments; a shorter loan term means you'll pay less in interest over the life of the loan.
• Interest rate: Mortgage interest rates can be either fixed or adjustable. An adjustable-rate mortgage (ARM) starts with an initial fixed rate that then changes at regular intervals, causing your monthly payments to fluctuate. Fixed-rate mortgages lock in the same interest rate during the life of the loan.
• Minimum qualifications: It’s possible to buy a house with no money down through some borrowing programs. There are also first-time buyer programs to incentivize homeownership.
• Property type: There are also unique programs for specific types of properties, including condos and new construction.

4. Find the best mortgage lender

Once you know the type of loan you’re looking for, it’s time to decide where you want to get pre-qualified. You might already have a local bank or credit union that you trust, or you might be better off with a dedicated lender or broker.

“Make sure you are working with a lender who understands your market,” said Sarah Alvarez, vice-president of mortgage banking at William Raveis Mortgage. “For example, in New York, there are many nuances with financing in different buildings and different apartment types, and you will want someone who is hyperaware of how this might impact your loan.”

Here are some tips for comparing your options:

• Read recent reviews: Comparing mortgage lender reviews gives you a good idea of what to expect with different companies. Look out for red flags, such as unexpected fees or a long, drawn-out closing process. It’s hard to measure customer service, but loan officers should help make it easier for you to get a mortgage, not harder.
• Compare rates: The lower the interest rate, the more money you’ll save over the life of the loan. That said, the lowest interest rate doesn’t always make for the best loan. See current national rates and learn how mortgage rates are determined to learn more.
• Ask about discount points: You might be able to “buy down” your rate through discount points. Also called mortgage points, these fees are paid at closing in exchange for a lower interest rate. One mortgage point is equal to about 1% of the loan amount and typically reduces your rate by 0.25%. (For example, one discount point on a $200,000 mortgage is $2,000.)
• Look for other benefits: Down payment assistance can be immensely helpful, especially for first-time buyers. Online applications are another huge perk — the ability to upload your documents securely and track your loan’s progress makes the whole process more convenient. Some of the best online mortgage lenders offer discounts when you enroll in automatic payments.

Not sure whether to go with a direct lender or broker? “One of the biggest advantages to working with a mortgage broker as opposed to a banker is that we are able to shop the entire market for our clients,” said Alvarez. “If, for whatever reason, there is an issue that comes up, we are able to quickly pivot to a different lender without having to start the process over from square one. This can save major time and headaches during what can already be a very stressful time.”

5. Find a real estate agent

A licensed real estate agent can help you make an offer on a home you love and avoid any costly missteps. To start your search for a real estate agent, research local agencies online and also ask around to friends, family or neighbors that have recently sold or bought a home to see if they recommend their agent. Narrow down your search by checking their credentials and setting up meetings or phone calls to make sure you’re compatible. In that meeting make sure you also go over the real estate agent’s contract so you know exactly what you’re committing to.

Once you’ve made a decision make sure to communicate with them throughout the mortgage and homebuying process. Your agent will be able to answer the majority of your questions (house or mortgage-related) and will serve as a mentor throughout the homebuying process.

6. Get your preapproval letter

When deciding on your loan application, lenders look at your credit score, income, debt, assets, employment history and other factors. The loan-to-value (LTV) ratio, which measures the loan amount against the property's actual value, is also important when lenders assess risk before approving or denying the application.

Once you have your preapproval letter, share it with your real estate agent. Your agent can include it with any offer to show the seller that you have the financial backing to make the purchase.

» MORE: How to get preapproved for a mortgage

7. Find a house and make an offer

After you're preapproved, it's time to search for a house in your price range.

Once a seller accepts your offer, you’ll work with your lender (and agent) to finalize the transaction.

When the seller accepts the contract, your loan officer starts working on a mortgage disclosure agreement. This is also when you’ll have to put down earnest money, which works like a deposit. The funds are credited back to you at closing.

Next, you will most likely get a list from your loan officer outlining any action items (updating a pay stub, for example).

8. Update your documentation

It can take up to 60 days to get a mortgage contract ready. You will most likely need to update some documentation you submitted earlier, including pay stubs, bank statements and credit reports, for your lender to officially approve the loan and move forward.

If it takes you longer to find a home, the lender will need to pull your credit report again. If you’ve collected debt during this time, it will be reflected in your new score. (That’s why it’s not a good idea to open any new accounts while you’re trying to get a mortgage —  a drop in your credit score could lead to you not getting a rate that you thought was locked in.)

The steps to complete a mortgage application are similar to those in the preapproval process, but this time it really counts. It’s always a good idea to verify your credit report and score again.

9. Prepare for closing day

After you've been officially approved for the loan to get the house you want, you're in the home stretch, when a few things happen:

You have at least three days to review the Closing Disclosure before closing.

• The underwriter evaluates your credit and job histories, debts, assets, income and savings to determine how likely you are to repay the loan.
• An appraisal will confirm the value of the house matches the amount you're asking to borrow. Once the appraisal is ordered and paid for, your lender will share a Closing Disclosure at least three business days before you close on the house.
• Your lender orders title work to verify there aren't any liens, claims, judgments or unpaid taxes or dues on the property.
• You purchase home insurance. You’ll also need to pay for the home appraisal and home inspection.
• The final walk-through is performed, usually within 24 hours of your scheduled closing.

Finally, on closing day, you’ll sign all your paperwork and pay your closing costs (including any origination fees).

It usually takes at least a month to close on a house, but some lenders offer ways to speed up the closing process. If you’re in a time crunch, find lenders that can minimize the time from mortgage approval to closing.

» LEARN: How to calculate loan interest

What happens when you don’t qualify for a mortgage?

If you don’t qualify for a mortgage, look back on the points made earlier in this guide on what lenders look at during the mortgage application process. If your application doesn’t get approved, take the necessary steps to improve your credit score, have a steady income, lower your debt and increase the amount you have set aside for your down payment.

That’s typically easier said than done and will take time. There are some alternative financing options if you’re in a rush to become a homeowner, including seller financing, rent-to-own agreements AND private lending arrangements. These options may not work for everyone, so do your due diligence before deciding on your next steps.

You should also ask the mortgage lender who reviewed your application what they recommend. They’ve seen your entire financial picture and may have some helpful tips to get you qualified sooner.

Bottom line: What happens when you get a mortgage?

Going through the mortgage process allows you to purchase the house or property you want. The process is similar if you are buying your dream home or a second home for rental income. It can feel like you are jumping through a lot of hoops to get pre-qualified and funded, but your home will now be considered your investment.