How to Get a Mortgage in 8 Proven Steps – What Documents You Need

With the housing market on fire and mortgage rates on the rise, it’s more crucial than ever to be well-versed in the mortgage procedure before house hunting.

The majority of recent buyers (87%) used a mortgage to pay for their property, while first-time buyers used mortgages to the tune of 10% higher than repeat buyers in research published by the National Association of Realtors in 2021.

Therefore, the individuals who are likely to have the least familiarity with the procedure are also the ones who will benefit the most from obtaining the appropriate mortgage and conditions for their situation.

In theory, obtaining a mortgage is not difficult; all you need to do is demonstrate to a lender that you will be able to repay the principal amount of the loan plus interest. However, beneath the surface, there is a great deal of moving parts and mechanisms.

Even seemingly insignificant decisions, such as how you will save for a down payment or what kind of mortgage you will receive, can have significant repercussions for your financial situation.

It’s crucial to find a lender with whom you can communicate freely and who has your best interests at heart. There is no “one size fits all” solution when it comes to loans; instead, it’s important to get advice based on your specific circumstances.

Here is the information you need to know about how to get a mortgage and select the mortgage and lender that are best suited to your specific needs.

1. Build and Improve Your Credit Score.

If your credit isn’t in tip-top form (and if it is congrats! ), you should take the time to clean it up.

However, credit scores are not incorporated in credit reports. You may easily and without cost check your credit score these days. Many large credit card companies, for instance, will gladly provide you free access to your FICO score.

You can get your VantageScore on other websites, but keep in mind that lenders use this model far less frequently than they do FICO and that the two scores may be very different.

A credit score between 620 and 640 is typically required by conventional mortgage lenders. The minimum credit score required to qualify for some government-backed loans is 500. A lower interest rate is likely the case the higher your credit score.

Making on-time and complete payments for all of your debts is one of the most effective strategies for raising your credit score. The biggest single contributor to your credit score is how on time your payments have been.

The percentage of available credit that has been used to repay debts is about 30% of your rating, so reducing your debt load is important.

Lastly, if you’re planning to qualify for a mortgage, it’s best to wait a few months prior to actually making any large credit purchases or opening any new lines of credit. Doing so can lower the overall duration of your credit file and increase the frequency of hard inquiries.

2. Know How Much Mortgage You Can Afford.

Any mortgage calculator will do if you only want to obtain a rough sense of what your monthly payments will be. However, you should be aware that the amount of money a bank is ready to offer you may be higher or lower than the amount you believe you can afford comfortably.

When deciding how much of a loan to provide you, a mortgage provider will consider your debt-to-income ratio (DTI). There is no hard and fast rule about what the maximum DTI should be for any given mortgage, but it’s usually somewhere around 45%. 

This means that if you have a monthly income of $6,000, you may be likely to qualify for a mortgage with an installment of up to $2,700, provided you have no other monthly debt obligations.

It’s not wise to take out a loan for that amount just because you have the option to do so. Generally speaking, a DTI of no more than 36% is considered healthy. That incorporates not only the monthly home payment but all of your debt obligations. 

On the same $6,000 monthly income, you might have up to $2,150 per month in debt plus mortgage payments and yet be inside the DTI of 36%.

3. Increase Your Savings.

Your initial point of focus for your savings should be a down payment.

It is essential to set aside money for a down payment so that you can make the largest possible initial investment. Aiming for a down payment of at least 20 percent can help you pay off your mortgage faster, qualify for a lower interest rate, and spare you the expense of private mortgage insurance.

A strong focus on building up your reserves is also essential. Even after you have paid the first down payment, a good rule of thumb is to have enough money saved up to cover the equivalent of around six months’ worth of mortgage reimbursements in a savings account. 

Having this safety net will help protect you in the event that you are laid off from your job or if anything else unforeseen occurs.

Do not overlook the importance of closing expenses, which refer to the fees that must be paid in order to complete the mortgage transaction. Depending on the type of loan, they can be anywhere from 2% to 5% of the loan’s principal. 

Escrow payments, which are considered a distinct expense, are not incorporated in these estimates either. In most cases, the annual upkeep and repair expenses associated with a home will amount to about three percent of its purchase price.

4. Choose the Right Mortgage Lender.

When searching for a mortgage, it is in your best interest to check around at the various rates and fees offered by different lenders. When you apply for a mortgage, the lending institution is expected to provide you with what is termed a loan quote within 3 business days of receiving your application.

Because each estimate for a loan has the same information, it is simple to compare not just the interest rates, but even the fees that you will be required to pay upfront for the loan. 

When you have several different loan quotes in hand, you are able to compare them, and you may even utilize the various offers to bargain with creditors for cheaper interest rates or costs.

In addition to this, you need to have an understanding of how the various forms of mortgages affect your circumstances. The amount of the down payment that is required of you may vary, depending on the type of mortgage that you decide to get. 

Also, the conditions of repayment can vary from mortgage to mortgage, which can have an effect on the total amount of interest you’ll pay over the course of the loan as well as the magnitude of your monthly payment.

5. Get Pre-Approved for a Mortgage.

The process of being pre-approved for a mortgage not only provides you with an accurate estimate of the amount of money you will be able to borrow but also demonstrates to sellers that you are a qualified buyer. 

A lender will evaluate your credit score as well as evidence of your employment, income, and assets before granting you a preapproval.

Although receiving a preapproval note does not guarantee that you will be eligible for financing, it does indicate to the seller that you have your financial situation in order to withstand an initial cursory assessment from a lender. This is an important step in the home-buying process.

The majority of preapproval letters have a validity period of sixty to ninety days, and when it comes time to register for a mortgage, all of your details will need to be confirmed once more.

In addition, be sure you don’t get the terms preapproval and prequalification mixed up. A pre-qualification is a rapid estimate of how much money you may be able to lease based on the numbers that you supply, and it does not require any verification from you.

Therefore, in comparison to a preapproval, it is not as stringent and carries significantly less weight.

6. Submit Your Application.

Preapproval for a mortgage does not exempt you from providing your most up-to-date financial details throughout the application process. This can incorporate:

• Two years worth of W-2 forms.
• The last 30 days of pay stubs.
• Past two years’ worth of federal tax returns.
• Verification of other funding sources.
• Checking account statements over the past few months.
• Details about long-term indebtedness such as vehicle or education loans.
• Identifying documents, including a Social Security number.
• Bank statements showing where your most recent deposits came from.
• Proof of any down payment assistance you received, such as letters attesting to monetary contributions.

Depending on the sort of mortgage you’re applying for, you may need to provide additional paperwork.

When a lender receives a loan application, they typically have three business days to provide a preliminary loan estimate that incorporates:

• The sum of money that will be needed to pay off the debt.
• Related expenses, including a breakdown of which ones are negotiable so you can get the best deal possible at closing.
• The annual percentage rate and interest rate.

Knowing your true rate can help you determine if you want to invest in discount points. These are one-time payment that effectively prepays a portion of your interest rate. The purchase of points is rolled into the final payment. If you’re planning on being a long-term resident of your house (at least seven years), points may be a suitable choice.

7. Wait for the Underwriting Process to Complete.

You should not assume that a lender will actually provide financing just because they have preapproved you for a loan. The underwriting division of the lending institution makes the ultimate call on loan approval after considering the applicant’s creditworthiness and the value of the collateral.

Once your financial data has been collected, it will be sent to an underwriter, who will use it to determine your creditworthiness. That verdict could be positive (a yes) or negative (a no) or even a request for clarification (additional information).

The underwriting procedure entails the following steps:

• An initial step in getting a loan is having a loan processor verify the data you submitted.

• A lender will typically require an appraisal of a property once an offer is accepted in order to verify that the amount is fair for the property. The condition of the home and nearby sales of similar homes (called “comps”) are two of many considerations in an appraisal.

• Before a property may be transferred, a title business will investigate any potential obstacles to the transaction and a title insurer will then issue a policy guaranteeing the results of the investigation.

• The underwriter will next make a final determination on whether to accept, approve with conditions, suspend pending additional documentation, or deny the application.

8. Close on the Home

You are getting very close to completing the mortgage application process if you have been officially authorized for a loan. At that time, there is nothing left to do but finish putting the finishing touches on the closing.

The procedure for closing a business can vary somewhat from one state to the next. It primarily entails verifying that the seller owns the property and is licensed to transfer the title. 

Moreover, ascertaining whether or not there are any other assertions against the asset that needs to be paid off, accumulating the funds from the client, and dispensing it to the merchant after debiting and paying any other fines and fees that may be applicable to the transaction.

There are many different kinds of costs associated with the closing process. The following are examples of common closing costs:

• Appraisal charge
• Cost of a credit check
• Fee for the initial transaction and/or underwriting
• Insurance premiums and other service costs
• Prepaids
• Payments to attorneys
• Recording costs and fees

During the closing, you will go over a large amount of paperwork, including specifics on how the monies will be distributed, and sign it. In addition to completing the closing or settlement, the agent will file the deal with the government.

How Can I Improve My Chances of Getting a Mortgage?

Examining your past credit behavior and current financial situation before applying for a mortgage is the most effective strategy to boost the likelihood that you will be granted financing for the purchase of a home. 

Because of this, you have the option to correct any mistakes or blemishes that may be found on your credit file, which could result in an improvement to your credit score.

Your chances of getting approved for a loan can be improved if you make a higher down payment or have more money saved up in savings, provided that you have the financial means to do so. 

Creditors are trying to determine how likely it is that you will return the loan, and possessing more “skin in the game,” also known as a safety net in case of unforeseen circumstances, will function in your best interest when making that determination.

How Long Does it Take to Get a Mortgage?

We are accustomed to having our wishes granted quickly in this day and age, thanks to the proliferation of same-day delivery services and mobile devices. You make a few taps and clicks on your phone, and then within a few hours, a drone delivers a package to your front porch.

However, that’s not how the mortgage application process works. When applying for a mortgage, how long should one expect the process to take? Most likely for a greater length of time than you anticipate.

The process of getting a mortgage in today’s world is highly extensive, particularly when it comes to the documentation that must be provided, the verifications performed by third parties, and the independent assessment procedure. In the event of a problem, the processing time may be extended due to the number of moving parts involved.

The complete process of getting a mortgage consists of multiple steps, the first of which is getting pre-approved for the loan, followed by having an appraisal done on the home, and finally receiving the real loan. This procedure usually takes approximately a month, giving or taking, on an ordinary market.

It might take longer than usual, anywhere from 45 to 60 days on average, depending on the lender, during high-volume months. If the lender discovers any financial problems in your record (such as a low credit score, a previous foreclosure, or heavy debt), the process of obtaining a mortgage can become slower and more complicated.

Is It Possible to Get a Mortgage with Poor Credit?

When you have bad credit, it might be challenging to get a mortgage, but it’s not impossible. Simply put, the answer to that question is contingent on a great deal of different things. If your credit score is low, you should expect to pay a higher interest rate on your mortgage, and you might also be required to make a larger initial down payment.

If you have a low credit score, then the cost of borrowing money will be higher for you. Your monthly payment will be higher if the interest rate is higher, which will result in a lower loan amount that you are qualified to get. This indicates that you will need to make cuts to your budget for purchasing a property.

When you have poor credit, it might be tough to qualify for conventional loans. Therefore, it is highly likely that you will be required to submit an application for a loan backed by the government. 

You just need a credit rating of 500 or higher to qualify for an FHA loan if you make a down payment of 10% of the purchase price, and you need a credit rating of 580 or higher to qualify for an FHA loan with a down payment of 3.5% of the purchase price. 

However, lenders have extra restrictions that go above and beyond the guidelines established by the FHA, and many of them will not give FHA loans to debtors with credit scores that are lower than 620.

Bottom Line

When you register for a mortgage, the lending institution will look at a number of different variables. They will look at your assets, your income, your employment history, your credit score, the ratio of your debts to your income, and the kind of property you wish to buy. 

You will be responsible for giving them all pertinent evidence that will verify your suitability to be granted a loan. This can incorporate things like pay stubs, tax returns, and bank statements.

The application for preapproval is the initial stage in the process of obtaining a mortgage. When you get preapproved for a loan, you will have a solid idea of the maximum loan principal that you can acquire. 

This will make it much simpler for you to look for homes that are within your price range. After you have been pre-approved for a mortgage, you are able to begin the process of looking at different houses and may even decide to seek the assistance of a real estate representative.

Once you have found the ideal home, your real estate agent will be able to assist you in making an offer on it. In the event that your offer is accepted by the seller, you will be required to obtain complete approval from your lender. 

The full approval process also incorporates the underwriting and the assessment of the property. As soon as your application is accepted, you will be required to undergo a closing meeting, seal the closing papers, and make your down payment as well as any other closing charges.