How to Apply for a Mortgage

7 steps to take when applying for a mortgage

The mortgage application process involves a lot of steps and paperwork. Here are the steps you’ll generally take before and after you apply for a mortgage:

1. Evaluate your financial situation

The type of mortgage you need will vary based on your circumstances, so it’s important to think about your financial situation upfront. For example, first-time homebuyers and veterans may benefit from a government-backed loan with a low or no down payment. People with fair or poor credit will need a lender who’s willing to work with credit issues.

2. Search for mortgage lenders

Next, you’ll need to shop for a mortgage lender. Many lenders offer mortgages that fit a variety of needs. It’s best to research at least a few different lenders before choosing a mortgage lender to apply with.

If you aren’t sure exactly what loan you need, a lender can suggest the best type of loan for your situation. You may also opt to work with a mortgage broker who can help guide you through the entire process.

3. Get prequalified

Many mortgage lenders let you prequalify for a mortgage online with a soft credit inquiry, which won’t impact your credit score. Lenders will consider factors like your self-reported income, credit score, intended property and down payment amount.

When you prequalify, a lender will share the rate and term options that may be available to you. If you decide you want to apply with a lender, you’ll then select the one that’s best for your situation, and your lender will transition to the preapproval process.

4. Apply and get preapproved

Once you’ve identified a lender you’d like to work with, the next step is to get preapproved for a mortgage. To get preapproved, you’ll need to fill out an application with your personal and financial information. You’ll also need to provide supporting documentation, such as tax returns, pay stubs, W-2s and bank statements.

Once you’ve provided all the required documents, the lender will complete the credit and income verification process, which includes a hard credit check. Once preapproved, you’ll receive a preapproval letter to include with your purchase offers.

Why get preapproved?

Getting preapproved before shopping for a home lets you show the seller a preapproval letter from the lender. This shows you’re serious about a home offer.

5. Find a property and make an offer

You’re now ready to shop for your home and make a purchase offer. It’s generally best for a real estate agent to include a preapproval letter with your purchase offer, which will help you stand out as a financially solid buyer.

6. Receive final loan approval

After your offer is accepted by the seller, you’ll provide the purchase contract to your lender. The lender will review the offer and property details, order an appraisal and finalize your loan details. Once this is done, you’ll receive final loan approval.

» MORE: What is mortgage underwriting?

7. Close on your home

The last step is to make your down payment, sign the paperwork and close your loan. Depending on where you live, a real estate attorney or title company will typically assist your lender with the loan closing. When your loan is closed, you’ll be ready to move into your new home.

Types of mortgage loans to consider

As a part of the mortgage application process, you’ll need to decide what type of home loan you want to apply for, such as conventional loans or government-backed loans. Note that lenders tend to have less strict qualifications for government-backed loans, such as Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) loans.

Conventional loans

Most conventional loans follow standards set by Fannie Mae and Freddie Mac, which makes them eligible for competitive interest rates. Borrowers with credit scores of 620 or higher can often qualify, and putting 20% down helps avoid private mortgage insurance (PMI). However, you can typically put down as little as 3% to 5% for conventional mortgages.

FHA loans

FHA loans are common loans for first-time homebuyers. These government-backed loans require a 3.5% down payment with a credit score of 580 or higher or a 10% down payment with a credit score between 500 and 579. However, some lenders may only accept credit scores of 580 or higher.

However, FHA loans require mortgage insurance premiums (MIP) for the life of the loan, which adds to long-term costs. Still, they’re ideal for buyers with limited savings or poor credit who want a manageable path toward owning a home.

VA loans

VA loans are available to active-duty service members, veterans and eligible family members. These loans are best for qualified borrowers who want to buy or refinance a home with favorable terms and minimal upfront costs.

VA loans don’t require a down payment or private mortgage insurance, and they may feature lower interest rates than conventional loans. They also may have more flexible credit requirements and limited closing costs.

USDA loans

USDA loans are meant for low- to moderate-income borrowers purchasing homes in eligible rural areas. These loans don’t require a down payment, making homeownership more affordable outside of major cities.

These loans are ideal for people seeking affordable housing in qualifying rural communities who are able to meet eligibility criteria. To qualify, buyers must meet income limits based on location and property eligibility standards.

Requirements for getting a mortgage

Most mortgage lenders evaluate your entire application when approving you for a mortgage. Weaknesses in one area don’t necessarily mean you can’t get approved. For example, a lower credit score may be offset by a higher down payment. And having multiple borrowers on a mortgage may increase your chances of approval.

Some of the most important factors lenders evaluate before approving your mortgage are:

Credit score and history

You usually need a credit score of at least 620 to qualify for a conventional mortgage, but lenders typically allow lower scores for government-backed loans. The lender will also evaluate how long ago any significant derogatory credit events, such as bankruptcies or foreclosures, occurred.

Job history

Most lenders want to see at least two years of stable job history. Depending on the lender, time spent in school may qualify as job history. If you’re self-employed, you’ll need to show at least two years of stable income, typically through bank statements.

DTI ratio

Your income documentation usually needs to show a DTI ratio of no more than 36% to 43%, depending on the lender. However, some lenders may allow a DTI as high as 50%. Your existing debt and new mortgage are included in this calculation.

Cash reserves and other assets

You’ll need to show that you have enough cash for the down payment. Additionally, you often need enough remaining cash or marketable securities to cover two to six months of mortgage payments.

Property type

Some lenders don’t finance purchases of certain property types, like manufactured or very old homes. Because of this, you’ll need to provide details about your property type when applying for a mortgage.

Down payment

Conventional loans typically require a minimum down payment of 3% to 5%, while VA loans and USDA loans don’t require a down payment. If you want to avoid paying PMI, you’ll need a down payment of 20%.

» MORE: How old do you have to be to get a mortgage?

Documents needed to apply for a mortgage

Most of the documents you’ll need to apply for a mortgage will show your lender the amount of income you earn regularly, the amount of cash you have on hand and details about the property you want to purchase.

The documents you need to give your lender when you apply for a mortgage typically include:

• Two years of tax returns
• Two years of W-2s
• Two recent pay stubs
• Divorce decrees
• Legal documentation for child support and alimony income
• Two months of bank statements and investment account statements
• Real estate purchase contract or construction contract

Mistakes to avoid when applying for a mortgage

Make sure you avoid the following mistakes when applying for a mortgage:

Focusing too much on rates

While it’s important to search for the best possible rate, focusing on rates too early in the process is a problem if the lender doesn’t offer mortgages that fit your needs.

“The biggest mistake we see prospective clients make is they start by calling multiple companies to get the lowest interest rate quote before they do an actual application,” said Jay Dacey, president of Jay Dacey Mortgage Team, a brokerage based in Minnesota.

Not learning the lender’s requirements before applying

To avoid having your mortgage application rejected because you don’t qualify, learn about a lender’s requirements before applying. For example, a lender may only offer financing to people with very good credit and large down payments.

Many lenders will check to see if you prequalify using a soft credit check, which doesn’t affect your credit score. This is a quick way to see if you meet the basic requirements without going through the full application process.

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