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- Make sure you understand how much house you can comfortably afford before starting the mortgage process.
- Figure out what type of mortgage you might want first so you can narrow down your search for a lender.
- Getting a mortgage can be a long and stressful process. Preparation can make it go more smoothly.
For most people, buying a home starts with getting a mortgage. And there's quite a bit involved in that.
Whether you're a first-time buyer or a current homeowner looking to upgrade, the sheer amount information you have to wade through can feel overwhelming. Going into the process knowing what to expect and how to approach it is key to keeping the stress under control and finding the best option for you. This guide will help you do it.
Understanding mortgages
What is a mortgage?
A mortgage is a loan from a bank or mortgage lender that enables you to borrow money to purchase a home. A mortgage is a type of secured loan, meaning the lender can foreclose on your home if you default on the debt.
Types of mortgages
The first step in getting a mortgage is determining the type of mortgage you need. There are many different options, and the right one for you depends on your needs and your financial health.
First, you'll need to decide if you want a conventional or government-backed loan.
Conventional loans
Conventional loans are mortgages not backed by the government. These loans usually have stricter eligibility requirements such as a higher credit score, lower DTI ratio, and larger down payment. But if you have good credit, they can be an overall more affordable option.
Most conventional loan borrowers get a specific type of conventional loan called a conforming mortgage. These are mortgages that conform to Fannie Mae or Freddie Mac's guidelines and don't exceed the conforming loan limit.
If you need to get a loan for a larger amount, you might need to get a type of non-conforming mortgage called a jumbo loan.
Government-backed loans
As the name suggests, these types of mortgages are backed by federal agencies. There are three main types:
- FHA loan: Mortgages insured by the Federal Housing Administration have a low down payment of 3.5% and less stringent credit guidelines. Mortgage insurance is required both at closing and annually with these mortgages.
- VA loan: VA mortgages are backed by the US Department of Veterans Affairs, and they are provided to active military members or veterans who meet minimum service requirements. They require no down payment or private mortgage insurance.
- USDA loan: US Department of Agriculture loans are for low-to-moderate income borrowers who are buying homes in rural or suburban areas. No down payment is required.
Other types of mortgages
The loans mentioned above are the most popular types of mortgages, but there are many more home loans out there to suit your specific needs. For example, some lenders offer physician loans or other types of mortgages for professionals who have large amounts of student debt but high incomes.
Lenders that offer non-QM loans, which don't adhere to typical mortgage standards, often have options to help self-employed borrowers or property investors get a mortgage. Renovation loans allow borrowers to roll the costs of a home renovation into their home purchase or refinance mortgage.
Additionally, many lenders offer their own unique programs, like specialty first-time homebuyer loans, that help those who might not otherwise qualify for a mortgage.
Comparing fixed-rate vs. adjustable-rate mortgages
In addition to choosing a type of mortgage, you'll also need to think about whether you want a fixed-rate vs. an adjustable-rate mortgage (ARM).
Most borrowers prefer fixed-rate mortgages because they're more predictable. For the entire life of your loan, the rate on a fixed-rate mortgage won't change.
This is a benefit if rates go up after you close on your loan, but it can be kind of a bummer if rates start to go down. For those with a little more risk tolerance, an adjustable-rate mortgage can help you take advantage of lower rates down the road.
When you have an ARM, your rate will stay fixed for a certain period of time — often five, seven, or even 10 years. After that, your rate will adjust based on current market rates. It may adjust once or twice per year.
ARMs sometimes (though not always) have lower starting rates compared to average fixed mortgage rates. If you plan on moving or refinancing before the rate adjusts, an ARM could be a good deal. But if you end up stuck with the loan for longer than expected, you risk taking on a higher rate and a higher monthly mortgage payment.
Benefits of each mortgage type
The right type of mortgage for you depends on your needs and your finances.
Conventional conforming loans are by far the most popular option among borrowers, but they aren't for everybody.
You might like a conforming loan if you have good credit, a sizable down payment, or both. Though conforming loans allow down payments as low as 3%, if you put more than 20% down, you won't have to pay for private mortgage insurance. You'll need a minimum 620 credit score to get one of these loans, and higher scores will have access to better rates.
FHA loans are one of the best mortgage options for first-time buyers since they allow low down payments and credit scores as low as 580. If you can bring 10% for a down payment, you could even qualify with a credit score of just 500.
VA and USDA loans are extremely affordable thanks to their 0% down payment requirement, but they're limited in who they're available to.
If you're not sure what mortgage is right for you, look at some lenders that offer a wide range of loan options and talk to a loan officer about which one might best suit your needs. They can run you through the pros and cons and even give you quotes to compare multiple loan types at once.
Preparing for a mortgage
Assessing your financial health
Two of the most important factors that will determine your ability to qualify for a mortgage are your credit score and your debt-to-income (DTI) ratio.
Credit score
"When it comes to homeownership, your credit score, along with your debt-to-income ratio, is a major factor in determining what your loan terms will be," says Shelby McDaniels, national director of business development at Chase. "That is, whether you'll be approved for a mortgage, and if so, at what rate."
You can check your credit score for free using a service like Credit Karma or Credit Sesame. Many credit card issuers will also provide this information for free on your online account or your monthly statement.
"Any score in the 700s or above is considered a good credit score, and will help you get a loan with lower interest rate, says McDaniels.
Here are some tips on how to improve your credit score for a mortgage:
- Ensure you're paying your bills on time, every time
- Check for errors on your credit report
- Lower your credit utilization by paying down debt or asking for a credit line increase
In addition to boosting your score, paying down debt will also help lower your DTI.
Debt-to-income ratio
Your DTI is a calculated percentage of how much money you pay towards debt each month vs. your monthly income. Mortgage lenders use this ratio to determine how much you can afford to spend on a monthly mortgage payment.
"The higher your ratio, the riskier they consider lending to you to be, and the smaller chance you have of being approved for a home loan at a good rate," says McDaniels.
A DTI ratio of 36% or less is generally considered to be good. When it comes to mortgages, 50% is usually the highest DTI that will allow you to qualify for a loan.
Figure out what you can comfortably afford
As you prepare your finances for the mortgage process, you should also use this time to determine how much house you can afford comfortably. This is not the same as how much the lender will approve you for.
"Typically, mortgage lenders look at gross income to determine what clients can afford, but homebuyers should really look at what they live on and how they manage monthly budgets," says Nicholas Lynch, senior vice president of mortgage sales at Webster Five Bank in Massachusetts.
You know your own finances better than a lender does. Think about what your budget can handle when deciding how much you can afford to borrow. This may end up being less than what a lender says you're qualified for.
A mortgage calculator can help you see how different home prices, down payment amounts, and mortgage rates can ultimately impact how much you pay each month.
Saving for a down payment
"It's a myth that you're required to put 20% down to purchase a home," McDaniels says. "Some home loans may require far less of a down payment (between 3% and 5% percent), and the industry average is typically within 6% and 8% percent."
Many first-time homebuyers put the minimum amount down, which still often ends up being at least several thousand dollars. You'll also need to have cash to cover your closing costs, which are typically between 3% and 6% of the loan amount.
Saving for a down payment can take a long time. Automating your savings so a portion of each paycheck is automatically tucked away can make the process easier. You may also be able to grow your savings faster by placing them in an interest-earning account, like a high-yield savings account or a CD.
You may also qualify for down payment assistance. See if your state or local housing authority has any grants or loans that could help you reach your goal sooner. Some lenders also offer down payment assistance.
Choosing the right mortgage for you
Comparing lenders and mortgage rates
To find the best mortgage lenders with the lowest rates, you'll need to do your research and shop around.
First, look for lenders that offer the type (or types) of loan you're considering. Narrow down your search based on which lenders have features that you like (such as flexible credit requirements or down payment assistance) and what previous borrowers say about them. You want a lender that's going to make the process go smoothly for you and ensure that you close on time.
Then, once you have three or four lenders in mind, you can get preapproved with at least one of them.
Getting preapproved for a mortgage
One of the main benefits of getting preapproved for a mortgage is that you can get an idea of how much you'll qualify for before you start shopping for homes. When you make an offer on a home, you'll include your preapproval letter to show the home seller that you will likely be able to get financing to go through with the purchase.
A preapproval doesn't guarantee approval for a mortgage, but it helps with negotiations with home sellers as it shows you took the extra step to understand how much house you can afford.
You only need one mortgage preapproval letter to shop for homes, though you can get preapproved with multiple lenders at this point to compare offers and see what kind of rate you might get.
But you may also choose to wait to apply with more lenders until you're under contract. Once you have a signed purchase contract, a lender will take you through the full approval process, and you'll be able to lock in a rate.
However you do it, try to keep any hard credit checks within a 45-day window to avoid taking a hit to your credit score. When you apply for a mortgage, a lender may do a hard check of your credit, which shows up on your credit report. When you keep multiple checks within a shorter period of time, it's understood that you were shopping around for a loan.
Understanding mortgage fees and costs
As you compare rates between lenders, be sure to look at your overall costs as well. If a lender offers an unusually low rate, find out if they charge any lender fees.
Many lenders charge origination fees to cover the costs of originating your loan. Lender fees will be included as part of your closing costs, so the higher the fees, the more you'll need in cash at closing.
Once you're approved for a mortgage, your lender will provide you with a loan estimate, which will include a list of your expected closing costs, including lender fees.
The mortgage application process
Documents you will need
Once you're ready to apply for a mortgage, you should make sure you have all your documentation ready to go. The lender will go through your finances with a fine-tooth comb, looking at your credit, income, employment history, debts, and assets.
Having your documents ready will make the process go much more smoothly.
Here are some of the most commonly-required documents for getting a mortgage. There may be more, depending on your individual circumstances:
- Tax returns
- Pay stubs, W-2s, or other proof of income
- 1099 forms, or profit and loss statements if you're self-employed
- Bank statements, retirement account statements, and proof of other assets
- Credit history
- Divorce decrees, child support decisions, etc.
- Photo ID
- Renting history
Wait until you've closed to put all these files back into storage; it's not uncommon for a lender to ask to see something again.
Step-by-step guide to applying
Ready to apply for a mortgage? Here are the steps to getting approved for a mortgage.
Step 1. Sign a contract to buy a house
A mortgage preapproval will help you get an offer accepted, but you can't get fully approved until you have a signed purchase agreement. This means that you've made an offer to a seller and they've accepted.
Though it's not a requirement, it's a good idea to set up a home inspection as soon as you're under contract. Having a licensed inspector look at the home and make sure there aren't any major issues can save you a lot of money down the road.
Step 2. Submit an application
Applying with three or four mortgage lenders once you're under contract will enable you to compare multiple offers and make sure you're getting the best deal. But if you already know which lender you want to go with at this point, you can just apply to that one.
Many lenders now offer convenient, completely-online application processes that make it easy for you to upload the necessary documentation. If you prefer, you may also be able to get started with your preferred lender in person or over the phone.
The loan officer or online application will walk you through the process and let you know what information you need to provide.
Step 3. Look over your loan estimate
Within three business days of receiving your application, the lender will send you a loan estimate. This is a detailed document that shows how much the mortgage will cost at closing and on a monthly basis.
The Consumer Financial Protection Bureau has an example of a loan estimate on its website that can help you understand what it looks like and the information it should contain.
If you applied with multiple lenders, the standard loan estimate form makes it easy to do a side-by-side comparison of what you'll pay with each lender.
Step 4. Shop for homeowners insurance
Mortgage borrowers are required to have homeowners insurance. You'll want to start shopping for a policy as soon as possible to give yourself time to compare quotes. You'll need to set up a policy ahead of closing.
Step 5. Go through underwriting
A big part of the mortgage process involves providing a lot of documentation fairly quickly and then waiting around for the underwriting process to be complete.
Underwriters are the people who look at your finances and make sure that you can afford the loan. Be sure to check your email regularly and answer calls from your lender during this time, since underwriters may ask for more documents or other information before they can approve the mortgage.
At some point during this process, an appraiser will visit the home you're purchasing to make sure it's actually worth what you've agreed to pay for it. Lenders won't give you more money than what the property is worth, so if your appraisal comes in low, you'll need to bring more of your own money to the table, try to renegotiate, or walk away.
The lender will also order a title search during this time to make sure nobody else has a claim to the property. If there are issues with the title, like a lien from unpaid taxes, this will need to be resolved before closing.
Step 6. Lock your rate
You'll need to lock in your mortgage rate sometime before closing. Rates fluctuate from day to day or even hour to hour. Locking your rate in means you're guaranteed to get that rate, provided you close before the rate lock expires.
Talk to your loan officer about when you might want to lock in a rate, and keep an eye on how mortgage rates are trending. You'll generally need to have your rate locked in at least a few days before closing.
Step 7. Get cleared to close
Once underwriting has thoroughly vetted you and determined that you qualify, you'll be told that you're "clear to close." This is a huge milestone in the mortgage process, and it means that you can start preparing to close on the loan.
Closing on your mortgage
After a lengthy approval process, you're finally nearing the finish line. You'll receive a closing disclosure at least three days before your scheduled closing date. This form will look just like your loan estimate and it will include your finalized costs. You can compare it to your initial estimate to see if your costs changed at all. Talk to your lender if you have any questions.
You'll complete your final walkthrough a few days before closing. This involves walking through the home you're purchasing and making sure it's in the same condition it was when you agreed to buy it, and that any agreed-upon repairs have been completed.
You'll also receive instructions for how to pay your down payment. This is often done with a cashier's check or by wiring the funds to the title company overseeing the closing process.
After getting your mortgage
Making mortgage payments
Once you close on the loan, you'll need to start making mortgage payments. Many lenders make this easy by offering convenient online portals where you can make payments quickly or set up automatic withdrawals from your checking account.
It's relatively common for mortgage lenders to sell the servicing rights to your loan to a different lender after closing. This means that instead of making monthly payments to the lender you originally got your mortgage with, you'll make your payments to the lender that purchased your loan. Keep an eye out for mailed notices that the servicing to your loan has been sold.
Tips for managing your mortgage
Make sure you're always paying your mortgage on time. Setting up automatic payments ensures you stay current on your loan.
The first couple of years of homeownership can be difficult getting used to, particularly if your monthly payment is higher than what you used to pay. You may need to take some time to re-asses your budget and find areas you can cut costs.
On top of your mortgage, you'll also have utility bills, regular maintenance costs, and repairs. Be sure to think about these costs ahead of time, and have an emergency fund set up so you can more easily cover unexpected expenses as they come up.
You may also find that after your first year of homeownership, your monthly mortgage payment jumps up a bit. Even fixed-rate mortgage payments can increase over the years due to your property taxes or homeowners insurance increasing or an escrow shortage.
Homeownership comes with a lot of costs that renters don't have to deal with. The best way to be sure you can handle your mortgage is to avoid taking on too large of a loan in the first place and plan ahead for costs that aren't included in your mortgage payment.
How to get a mortgage FAQs
Borrowers typically get started with a mortgage by applying for preapproval with a lender they're interested in. But before you get to this point, you'll need to make sure you're prepared for the process. This means saving for a down payment, preparing your credit and finances, and gathering up all the documentation you'll need for your application.
Your credit score is one of the main factors a lender will look at when determining whether you qualify for a mortgage. Higher credit scores can help you get a better rate. You'll typically need at least a 620 score to qualify, but this varies by loan type.
How hard it is to get a mortgage depends on a lot of different factors. If you generally have good credit and a low debt-to-income ratio, you may have an easier time qualifying. If you have a rockier credit history, you might be able to qualify for an FHA loan. You can get an FHA loan with a 580 credit score, or 500 if you make a 10% down payment.
Yes, several mortgage options, including conventional loans and FHA loans, allow lower down payments for qualifying borrowers.
Prequalification generally refers to an informal assessment of your mortgage eligibility based on a soft credit check and borrower-reported financial information (like stating how much income you earn). Preapproval typically offers a bit more certainty, since the lender will often perform a hard credit check and may even ask for some documentation of your finances. But sometimes these terms are used interchangeably.
The length of this process varies, but typically it takes around a month or more from the time you submit your application to the time you close.
Yes, you can refinance your mortgage in a few months or years if you choose to and are able to qualify for a new loan. Homeowners often refinance to take advantage of lower rates, reduce their monthly payments, or tap into home equity.
