How to get a mortgage: A step-by-step guide

In a nutshell

Understanding how to get a mortgage gives you the confidence to tackle the homebuying process head-on, make smart choices, and steer clear of any bumps along the way.

• A mortgage pre-approval kicks off your house hunt and streamlines the mortgage process.
• Comparing options helps secure the best mortgage because terms and rates vary.
• Making informed decisions about your mortgage terms and navigating the details of the paperwork are crucial for a successful home purchase.

Step 1: Determine a budget

While browsing homes online is accessible to all, purchasing a home hinges on having a well-defined budget. So, before diving into the exciting world of home shopping, getting a good handle on your finances is important. Take some time to assess your income, expenses, and any outstanding debts. Remember, keeping your debt low means you will have more money available for your mortgage every month.

If you’re feeling a bit overwhelmed trying to figure out how your dream home fits into your budget, a handy mortgage calculator can help. Simply input the home price, loan amount, and mortgage rate to estimate your monthly payments.

Also, remember to consider the upfront costs. When you're getting ready to buy a house, make sure you have enough money saved up for both the down payment and the closing costs. Across the U.S., closing costs average around $4,243 — or 1.87% of your home loan's median value — according to recent data from Assurance IQ. However, closing costs can vary and reach upwards of 5%. Closing costs also differ from place to place. According to the National Association of Realtors, the country’s highest closing costs are in the District of Columbia followed by Delaware and New York. The lowest closing costs are in Indiana and Missouri.

Now, let's talk about down payments. While you can usually put down as little as 5% of the home's sale price, if you put down less than 20% and you are taking out a loan with a conventional lender (like a bank), you will likely have to pay private mortgage insurance (PMI). Some first-time homebuyer programs offered by states and the Federal Housing Administration (FHA) allow you to put down 5% without also buying PMI.

Step 2: Get pre-approved

A mortgage pre-approval from a lender signals that they’re willing to fund your home purchase. It also shows sellers you're serious and financially prepared.

While all lenders have their own mortgage pre-approval criteria, here are some common requirements:

• Identification: Lenders need a driver's license/passport and Social Security number to verify your identity.
• Employment and income: Pay stubs or tax returns show your ability to make payments.
• Proof of assets: Bank statements and investment accounts demonstrate financial stability.
• Credit history: Lenders assess your credit report to determine your creditworthiness (which affects your mortgage terms).
• Debt statements: Details of current debts help calculate your debt-to-income ratio.
• Gift letter: If funds are gifted for the down payment, a letter confirms they're not a loan.

Remember, getting preapproved for a mortgage speeds up your home search. Without it, you risk losing to buyers with ready financing.

It's also a good idea to shop around with multiple lenders to compare rates and fees. While preapproval mortgage rates aren't set in stone, they give you an idea of what to anticipate when you formally apply for a loan.

Step 3: Find the perfect home and make an offer

As you move forward in your home buying journey, the most important thing is finding a home that meets all your criteria. Whether it's a spacious backyard, a modern kitchen, or specific bedroom requirements, these preferences should guide your search. Working with an experienced real estate agent is crucial; they understand the local market and can help you consider factors like location, size, and amenities.

When you’re ready to make an offer, consider the price, the closing timeline, and any additional terms you may require, such as a 30-day move-out period.

Step 4: Finalize your mortgage

After the seller accepts your offer, it's time to kick off the mortgage application process. While having a preapproval can speed things up, it can still take some time. Underwriting can vary from a couple of days to several weeks.

Start by formally applying for the loan with your chosen lender. Consider factors like whether you want to opt for a fixed-rate or adjustable-rate mortgage and the length of your loan term. While 30 years is standard, opting for a shorter term, like 15 years, can save you on interest in the long run, even with slightly higher monthly payments.

Your application will undergo meticulous underwriting, during which the lender reviews your information and assesses risks. You'll need to submit documents such as W2s, tax returns from the last two years, bank statements, and monthly debt statements. Be ready to provide any additional documentation requested.

Step 5: Home appraisal

While the lender is busy reviewing your mortgage application and underwriting your loan, they'll also arrange for an appraisal. This means bringing in an independent expert to assess the fair market value of the home you're considering. Once that appraisal report lands, your lender can confirm the loan amount for your purchase. It's a crucial step because lenders won't lend out more money than the home is worth.

The home appraisal process isn't just a precaution, it's a way to prevent new homeowners from owing more on their mortgage than their home is worth.

Step 6: Closing

Once you've got the green light on your mortgage and the appraisal is done, it's time to lock in a closing date with your lender and the seller. Your lender will hand over a closing disclosure about three business days before the closing. This document lays out all your loan details, from your monthly payment to mortgage rates and closing costs.

You'll also see the origination fees, mortgage point costs, title insurance, and appraisal fees. Make sure everything lines up. If you need help, chat with your lender to iron out any discrepancies.

After carefully reviewing the closing disclosure, the final step is attending the closing meeting to complete the transaction. Payment for closing costs and the down payment is typically made through a cashier's check or wire transfer.

The AP Buyline roundup: Completing your journey to homeownership

Getting a mortgage is like following a roadmap with six key stops. It begins with setting your budget and getting pre-approved. Working with pros like real estate agents and trusted mortgage companies makes things easier. Paying attention to details and working together makes buying a home smooth and successful.

Frequently asked questions (FAQs)

What type of income do you need to qualify for a mortgage?

Lenders review your income and debts to gauge your mortgage eligibility and repayment ability. Qualifying income sources include:

• Income from employment, self-employment, and owning a business.
• Earnings and benefits from military service.
• Social Security income.
• Non-taxable income.
• Income from rental and investment properties.

Why do mortgage loans get denied?

Lenders can reject mortgage applications for various reasons. You might get turned down due to:

• A poor credit history or low credit score.
• No credit history at all.
• Not being able to cover the down payment and closing costs.
• A debt-to-income ratio above 36%.

Also, if the home's appraisal falls significantly below the purchase price, lenders may refuse the application because they don't offer mortgages that substantially surpass the property's fair market value.

Will I lose my deposit if I am denied a mortgage?

Usually, if you're denied a mortgage, it's a situation where you can hang onto your earnest money. But if you skip adding those contingency clauses when you make your offer, you may be risking your deposit if you end up not qualifying for the mortgage.

How much of a down payment do I need?

The down payment you need for a mortgage varies based on the loan type. Conventional mortgages typically require 3% to 5% down payment, but remember, you will also need to pay for private mortgage insurance (PMI). FHA loans usually require between 3.5% and 5%, while VA loans often require no down payment for those with good credit and a solid financial profile.

What is mortgage insurance?

Mortgage insurance is a safety net for lenders in the event you can't keep up with your mortgage payments. Mortgage insurance is usually needed if your down payment is less than 20%. Basically, if you miss payments and end up defaulting, the insurance kicks in to cover the lender's losses. But it doesn’t protect you as the borrower, and it adds to your monthly mortgage bill.