9 steps to getting a mortgage
1. Get pre-approved
The first step we recommend for any homebuyer is getting mortgage pre-approved. The idea behind getting pre-approved is simple: before you check what’s on the market, you need to be sure you know how much a lender will lend you.
As you may have already experienced, without prior approval real estate agents will not give you too much of their precious time (especially in a sellers market). They work on commission, and they might not take you – and the salespeople either – seriously until you can show them a pre-approval letter. For more information read our Verified approval process here.
When you are pre-approved, your credit is withdrawn. This gives the lender two things: your credit score and an overview of your credit report data. You must have a credit score of 580 to be eligible for a loan with the Federal Housing Administration (FHA) and a score of 620 for a conventional loan from Fannie Mae or Freddie Mac. A VA loan backed by the US Department of Veterans Affairs does not require a specific score, but lenders can set guidelines on their own. From Rocket Mortgage®, we are looking for a credit score of at least 580 for VA loans.
In addition to your credit score, lenders will see how much debt you have and whether you are trying to buy a home with any bankruptcies or collections on your record. If you have something like this on your record, there is still a possibility that you may be able to get a mortgage, but you may only be eligible for certain loan options.
The lender will also ask you questions about your income and assets initially to calculate how much you can afford based on a debt-to-income ratio (DTI).
You will also be matched with a preliminary loan program, although this may change later in the process.
2. Prepare your documents
In summary, most lenders require information regarding your debts and assets, your credit history, and proof of employment and income. Keep in mind that you won’t need all of these documents to get your loan pre-approved. However, the more information you can provide to your lender up front, the stronger your pre-approval will be, because you and the seller can be confident that your loan is more likely to be approved at the end.
Let’s break down the documents you need to prepare for your mortgage application.
To check your debts and assets, you will need:
- Bank account statements
- Recent statements of your investment portfolio, including retirement, stock and bond accounts
- Receipt of funds offered
- Documentation of your current mortgage
- Checking for other unpaid debts, such as car loans or student loans
When validating your credit history, your lender may ask for the following:
- Authorization to access and review your credit file
- An explanation of any financial incidents that might appear on your credit report, including bankruptcies, foreclosures, or defaults
Finally, to prove your employment and your income, you will need:
- The name, address and contact details of your current employer
- 2 years of W-2
- Profit and loss accounts, if you are self-employed
- Proof of child support, alimony or other types of income
- 1040 tax forms
Income and asset documents can be provided later at the underwriting stage, but submitting them up front will likely give you a better understanding of how much you can afford to pay.
3. Determine your budget
Your pre-approval letter will tell you how much money a lender is willing to let you borrow. However, just because you can borrow a certain amount doesn’t mean you need to push your budget to the limit. You can enter various purchase prices into a mortgage calculator to get a realistic estimate of a monthly mortgage payment. You can also add the cost of taxes and insurance if you know what they are likely to be.
You want to make sure you have enough money each month for your savings, emergencies, investments, and other expenses. Also, don’t forget to leave some room for play money!
4. Start the house search
Getting out and visiting homes is usually the most exciting part of the mortgage process. You can imagine what your life would be like in every house you pass through. While this is often one of the most enjoyable parts of this process, you’ll want to start with a solid game plan.
Depending on your budget, it may or may not be possible to find a home with all the features you want. With that in mind, it’s best to make a list of your top priorities for the homes you are considering to ensure that you save time on your home search.
Once you have established your wish list, we recommend that you hire a real estate agent. They know the market. They see a ton of homes every year and can work with you to find something that meets your needs and stays within your budget. Our friends at Rocket HomesSM can help put you in touch with an agent who can work with you to find a home that meets your needs.
5. Make an offer
Let’s say you’ve found the perfect home. Now is the time to make an offer. There are several things to think about here. You will work with your real estate agent or attorney to draft the purchase contract, which includes your offer for the purchase price as well as a list of anything you might want to include in the sale.
While these types of details are negotiable, sellers will likely want a deal with very few conditions – as clear a deal as possible. This can mean avoiding things like asking the seller for concessions and having furniture included in the deal.
It is also at this stage that you will make a deposit. This is a percentage of the purchase price given to the seller when the offer is accepted to show you are serious about the property.
6. Finalize the loan
Once you have legally bound your offer with a purchase contract, you are ready to apply for your mortgage and finalize the terms of the loan. If you haven’t already, you’ll need to consider the types of mortgages you’re eligible for, compare their respective rates, determine the down payment amount, and choose the length of the term.
Then comes the paperwork. While you may have already completed a fair amount of your application documents during pre-approval, you will need to gather final documents before you are allowed to close. Loan officers will need any information you haven’t yet provided about your debt, assets, credit, and income.
Once you have completed your application, your lender will provide you with a loan estimate. This document does not mean that you have been approved, but it will outline the details of your mortgage agreement, such as the total loan amount and the estimated value of the property you wish to purchase.
7. Wait for the subscription
Once your offer is accepted, the purchase contract is returned to your banker. The banker will review your options to make sure you are in the right loan program. Once that happens, your loan goes through underwriting.
During the underwriting process, an insurer will check your income, assets, and employment and compare them to your credit report information. Lenders always take the potential borrower’s credit early in the process, but a pre-approval only lasts 90 days.
If you’ve been looking for housing for a while, the lender may need to withdraw your credit again. Try not to take on more debt during the housing search process. Doing this while trying to buy a home at the same time could put your financing at risk.
Before closing the house, you and your lender will usually decide when to lock in your interest rate. Since mortgage rates can fluctuate multiple times a day, a mortgage rate freeze will ensure that your interest rate stays the same until closing or for 30 to 60 days after the freeze takes effect.
It is also during this time that your lender may request additional or updated documents if they need them for approval.
8. Get a home appraisal
Your lender will establish an appraisal of the home during the underwriting process. The appraisal protects you and the lender by verifying that the home is worth the price you agreed to with the seller.
During the appraisal process, the home is assessed against comparable properties in the area. This means that if the property you are buying is a two bedroom ranch with a newly remodeled master bathroom, the appraiser finds properties in the area that are as similar as possible to your property, reviews the sales data, and you gives a dollar value for the house you are looking at.
If the appraisal is lower than the sale price, you have three options: the seller can lower the price to the appraised value; you can carry the difference between the appraised value and the sale price at the closing table; or you can leave the house on foot (if you have an appraisal clause in your purchase contract).
9. Prepare to close
When the subscription process is complete, it’s time to move on to the closing table. You will bring photo ID, a copy of your closing statement, down payment, and all other closing costs to your closing meeting, then sign the mortgage and take possession of the deed.
There are ways to conserve your closing costs that you need to bring to the close. One way to do this is to increase the price of your offer in order to convince the seller to pay for other things. This way, you incorporate the closing costs into the loan.