How to Get a Mortgage: Here's a step-by-step guide

Key Points

Understand your financial status before applying for a mortgage.
Identify the best mortgage type for your situation.
Research and choose the right mortgage lender.
Get preapproved for a mortgage.
Submit a formal mortgage application with required documentation.
Undergo the underwriting process.
Prepare for closing on your new home.
Finalize the mortgage and move into your new home.

1. Give Yourself a Financial Checkup

Before you start the mortgage process, ensure you’re financially ready for homeownership. Assess your debts, savings for a down payment, and closing costs.

Credit Score: Lenders heavily consider your credit score. A score of at least 620 is typically required, but higher scores can lead to better rates.
Improving Credit: Pay down debts, dispute errors on credit reports, and avoid opening new accounts to build your credit before applying.

2. Identify the Right Mortgage

Different home loans cater to various financial situations and priorities.

Types of Mortgages

Conventional Loans: Common with stricter requirements and a minimum 3% down payment. Less than 20% down requires private mortgage insurance (PMI).
FHA Loans: Insured by the Federal Housing Administration, allowing for lower credit scores and gift money for down payments. Minimum down payment is 3.5% with mortgage insurance required for at least 11 years.
VA Loans: Available to service members and veterans, often with no down payment.
USDA Loans: Zero-down-payment loans for low-income borrowers in qualifying areas, backed by the U.S. Department of Agriculture.
Jumbo Loans: For properties exceeding conventional loan limits, suitable for more expensive homes.

Interest Rates

Fixed-Rate Mortgages: Interest rate remains constant for the loan’s duration.
Adjustable-Rate Mortgages (ARMs): Initial fixed rate that can fluctuate later. Suitable if planning to sell or refinance soon.

Mortgage Terms

30-Year Mortgage: Common with smaller monthly payments but higher overall interest.
Shorter-Term Loans: Options like 10- or 15-year mortgages, which have higher monthly payments but lower total interest.

3. Research Mortgage Lenders

Explore various lenders, including traditional banks, online lenders, and credit unions. Starting with your own bank might offer lower rates for existing customers. Specialty lenders can be beneficial if seeking specific loan types, like VA loans.

4. Get Preapproved for a Home Loan

Getting preapproved has advantages:

Shows sellers your offer is solid.
Provides a clearer picture of mortgage costs, including rates, APR, fees, and closing costs.
Compare preapprovals from at least three lenders to save on costs.

5. Submit Your Application

Even with preapproval, you must submit updated financial information for the formal application, including:

W-2 forms and tax returns from the past two years.
Recent pay stubs and bank statements.
Proof of other income sources.
Details of long-term debts.
ID and Social Security number.
Documentation for recent bank deposits and down payment sources.

Within three days, the lender will provide an initial loan estimate detailing costs, fees, and interest rates.

6. Begin the Underwriting Process

The lender will review your credit report and order a home appraisal. You will schedule a home inspection and negotiate repairs or price adjustments if needed. Avoid significant financial changes during this period, such as job changes or new debts.

Nerdy Tip
If you’re self-employed, you may have to provide extra proof of your financial stability, including having a higher credit score or large cash reserves, and possibly providing business tax returns.

7. Prepare for Closing

After loan approval, take the following steps before closing:

Purchase homeowners insurance.
Buy a lender’s title insurance policy and consider owner’s title insurance.
Do a final walk-through of the home.
Review updated loan estimates and closing disclosures three days before closing.
Arrange funds for closing costs, typically 2% to 5% of the home’s purchase price.

8. Close on the Home

Finalize the mortgage paperwork. Ask your lender any questions to understand all details. If you decide to back out, you might lose your deposit. Once everything is signed and completed, the home is yours, and you can move in!