The first step to getting 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 it will be.
Once you know you’re ready to buy a house, you have to decide what kind of loan to look for and pick a lender.
What should happen next: You get preapproved, find your dream home, close on the house and move in — but this is often easier said than done.
The process can be complicated. However, there are some creative ways to get your deal done — read plenty of reviews, negotiate mortgage points, ask about discounts and try to be strategic — so that everything works out.
When considering buying a home, you should:
1. Take your financial temperature
First, go over your credit report for accuracy and check your credit score. Most loans require a 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.
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.
The median down payment from mid-2019 to mid-2020 was 12% of the home’s purchase price.
Also, consider your debt-to-income ratio. DTI 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.
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 take 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.
If you have a good shot at approval based on your credit score and DTI, take a look at your savings account and think about how much you can put down. (It’s possible to buy a house for $0 down, but the downside is that you have to pay mortgage insurance premiums until you build up more equity.)
The average down payment might not be as high as you think. Still, it’s important to be prepared for the costs of homebuying.
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.
2. 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 offered 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 armed forces).
Conventional mortgages are issued by a private lender. They may conform to loan limits set by the Federal Housing Finance Agency (FHFA) — $647,200 in 2022. You 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 usually need a pretty good credit score.
|Government-insured||Good for||Learn more|
|FHA||Lower credit scores; smaller down payments||Compare lenders|
|VA||Current or former military members (or spouses)||Compare lenders|
|USDA||Buying homes in rural areas||Compare lenders|
|Conventional||—||Traditional buyers with good credit||Compare lenders|
|Jumbo (nonconforming)||—||Buying homes priced above the conforming loan limit||Compare lenders|
|Good for||Lower credit scores; smaller down payments||Current or former military members (or spouses)||Buying homes in rural areas||Traditional buyers with good credit||Buying homes priced above the conforming loan limit|
|Government-insured||Compare Lenders||Compare Lenders||Compare Lenders||Compare Lenders||Compare Lenders|
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 fixed 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.
3. Find the right 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.
Generally, people with higher credit scores go with a bank, while people with lower scores might have better luck with a credit union or online broker. Either way, get pre-qualified at this part of the process.
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. For example, here are some recurring themes in some of the top-rated mortgage company reviews:
- 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.)
If you aren’t sure if it’s worth it, figure out how long it’ll take you to break even by dividing the cost of your points by how much you'll save each month. If you plan on staying in your home for longer, then it's probably worth paying for upfront points and saving on interest over the life of your loan.
- 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.
4. Get your preapproval letter
In order to submit an application for mortgage preapproval, you first need to gather some paperwork. You’ll typically need credit documentation plus proof of income, assets and liabilities, including:
- Valid driver's license
- Recent pay stubs
- Two of your most recent bank statements (all accounts, all pages)
- Two years of W-2s
- Two years of tax returns
- Social Security card (if applying for down payment assistance)
An approval letter is good for 60 to 90 days.
Sometimes, borrowers may not know how to obtain pay stubs or bank statements, especially if they receive payment through direct deposit and don’t receive physical checks from their employer. If you’re unsure where to find copies of either, check with your employer’s human resources department and your bank’s customer service department.
You also have to know if you’re a payroll employee (W-2 tax return) or independent contractor (1099 tax return), and you should know what your credit score is to get the best idea of what rates you might receive.
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. These days, you might not even be able to see a property without one.
5. Find a house and make an offer
After you're preapproved, it's time to search for a house in your price range. A good place to start is a real estate website. (Pro tip: As you compare properties, it’s worth it to drive through the neighborhood at different times to see what the neighborhood traffic is like. Don't forget to check crime stats and school ratings if you have children.)
Once you find a house you like, put in an offer and see if the seller accepts. If they do, 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).
6. 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.
For example, say you get preapproved on Jan. 1, but you don’t find a house until March 30. Since it takes 30 to 45 days to close, your preapproval will expire before you can complete the transaction. The lender will need to pull your credit report again.
If you’ve collected debt during this time, it will be reflected on 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.
7. Prepare for closing day
After you've been officially approved for the loan to get the house you want, you're in the homestretch. There's not much for you to do but get ready for the closing day as you wait for processing and underwriting.
The underwriter evaluates your credit and job histories, debts, assets, income and savings to determine how likely you are to repay the loan. Next, an appraisal will confirm the value of the house matches the amount you're asking to borrow. Finally, if everything checks out, the mortgage is officially approved.
Your lender then orders title work to verify there aren't any liens, claims, judgments or unpaid taxes or dues on the property.
As a buyer, you’re responsible for getting home insurance before closing. There’s a flood check to make sure the property isn’t in a flood zone — if it is, you’re typically required to purchase flood insurance. The borrower also pays home appraisal and home inspection fees.
Once the appraisal is ordered and paid for, your lender will share a closing disclosure (usually online). They are legally required to share this disclosure at least three business days before you close on the house.
You have three days to review the disclosure before closing.
Your closing disclosure lists all the final terms of the mortgage loan, total closing costs and other details of the final transaction, including charges you’re obligated to pay into escrow (insurance premiums and estimated taxes paid each month as part of your mortgage agreement).
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.
For more, learn how to buy and sell a house at the same time next.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
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