How to Apply for a Mortgage

Some parts of buying a home are fun. Looking at houses you want to buy and imagining where your furniture will go and how you’ll live there can be exciting.
Applying for a mortgage, however, isn’t so enthralling. There are documents to gather, applications and forms to fill out, and lender questions to answer, among many other things.
A good real estate agent and mortgage lender should be able to help you through almost all of the process. But it’s a good idea to know what you’re getting into before you start shopping for a home, and we outline some of the basic steps below.

Steps for applying for a mortgage

Buying a home will likely be the largest purchase of your life. That doesn’t mean it has to be complicated. Breaking the mortgage application process down into steps can make it more manageable.
We’ve broken it into six steps, though your real estate agent, mortgage broker and others helping you along the way may have other requirements.
Much of the mortgage application process requires first doing your homework and gathering documents lenders need to ensure you can afford a home loan. You may then want to understand the minimum mortgage requirements, and then find a type of mortgage that fits your budget.
Then you’ll choose lenders to shop from, fill out a mortgage application, and talk to a loan officer before the underwriting process begins and you can get mortgage approval.

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1. Gather documents

This doesn’t have to be the first step, but it’s a good start because it will help you have most of the financial paperwork ready that a mortgage lender will need to start the loan process. It will also help you understand the basic requirements of getting a mortgage.
Having your financial documents in front of you will make filling out the loan application easier and can prevent surprises once the application process begins.
The first thing to do is to get your credit reports and check your credit score. AnnualCreditReport.com is a good place to start. It allows you to get a free copy of your credit report every 12 months from each of the three credit reporting companies.
Check your credit report for accuracy and fix any errors. You don’t have to have a high credit score to get a mortgage, though it will help, and a higher score will likely lead to a lower interest rate on the loan.
Some other types of documents you’ll need include:
  • Identifying information, such as bills in your name and two years of address history. Lenders will need your full legal name to pull your credit information.
  • Assets. These can include two months of bank and retirement statements.
  • Employment and income. Pay stubs and W-2 forms for the past two years may be needed, along with the address and phone number of your employer.
  • Tax returns for the last two years may be needed to verify the information.
  • Any documents showing income or money owed. These may include a divorce decree, child support, bankruptcy, tax payment plans, and loans.

Know the mortgage requirements

Some of the documents listed above will help a loan officer determine if you qualify for a home loan. Lenders can have different qualifications for different types of loans, but some minimum needs must be met for most of them.
Lenders want to know if you can afford a mortgage payment, how much debt you have in relation to your income, and what your credit score is so they can gauge the risk of giving you a home loan. They’ll want to verify all of this with documentation.
Here are three main requirements that are part of the mortgage application process:

Debt-to-income ratio

Called DTI for short, it’s computed by dividing your total debt by pretax income. The lower the number, the better, and it’s used to determine if you can repay the loan.
A DTI of 43% or lower is required to get a “qualified mortgage.” A 43% DTI means you’re paying 43% of your monthly income toward debt payments, such as credit cards.

Verifying assets

Lenders verify your assets to ensure you can repay the loan and can afford the monthly mortgage payment. Some of this is done by checking the documents you’ve hopefully rounded up before applying for a mortgage.
They want to see a paper trail of how you got your money, such as pay stubs and tax forms. If a large cash deposit landed in your bank account without a valid reason, it could raise a red flag.
Along with your income, lenders will want to know how much money you have in savings or other accounts, called cash reserves. Having a few months of mortgage payments in the bank can improve your approval odds.
Lastly, they’ll want to know how much money you plan to put down on the home. A down payment of 20% was once considered the norm, but now having less than 10% down is normal, and some loans require only 3% down. The higher the down payment, the lower your mortgage payment will be, which lowers your risk of defaulting on the loan.

Credit score

As mentioned earlier, lenders will check your credit score to determine how much of a risk you are. FICO credit scores range from 300 to 850. Knowing what your credit score is before you apply for a home loan can help you get an idea of what type of loan you qualify for, and can give you time to raise it before formally applying.
There isn’t a universal credit score needed to qualify for a mortgage. The minimum credit score requirement depends on the lender and type of loan, such as a conventional or government-backed loan.
A loan backed by the Federal Housing Administration, or FHA, for example, requires at least a 500 credit score with a 10% down payment. Raise that score to 580 and only a 3.5% down payment is needed.
For a traditional mortgage, many lenders require at least a 620 credit score. Having a FICO score in the good range of 670-739 should help you get low rates and terms.

2. Find a mortgage for your budget

There are many types of mortgages you can apply for. A loan officer, mortgage broker, or other such professional can help you decide which is right for your budget.
Here are some types of home loans and who they’re best for
Loan typeBest for
Conventional loanBuyers with good credit
30-year fixed-rateSeeking lowest fixed-rate payment
15-year fixed-ratePay off a loan faster at lower interest
FHALow- to moderate-income buyers seeking first home
VAVeterans with 0% down
USDABuyers in rural areas with 0% down
Freddie Mac Home PossibleNo credit score or low credit score
Fannie Mae HomeReady3% down payment

3. Shop for lenders

Shopping for mortgage lenders can be done at any time during the home buying process, but it may be best after you’ve gathered your financial information and know some of the basics about what’s required and what type of home loan you may want.
Contact at least three lenders, either by phone, visiting an office, or filling out an online application. This will help you find the best fit for you and will help you find the best mortgage rates. It will also allow you to compare their prices, which we’ll get to later.
You can shop at traditional banks, online lenders, mortgage bankers, and other types of financial institutions that offer a host of mortgages. Mortgage brokers work with multiple lenders and can give you more options than you’d find on your own, though brokers don’t determine if your loan is approved or denied.
By shopping online, you should be able to compare interest rates, and the minimum down payment and credit score needed for loans.

4. Fill out a mortgage application

Mortgage loan applications can be filled out online. This can lead to pre-approval and get you a loan estimate quickly so you can make an offer on a home.
First-time homebuyers may need a little more help. Lenders should be willing to work with you over the phone and may fill out an application for you by asking you questions that they’ll fill in the answers to.
The application may be similar to the Uniform Residential Loan Application, a five-page form that asks about your debts, assets, employment, the loan, and the property you want to buy.
Submitting more than one application won’t hurt your credit score if they’re done within 45 days.
You may also want to hire a home inspector early in the application process so that you don’t waste time backing out of a loan if the inspector finds major problems that you don’t want to deal with. Lenders don’t require home inspections this early in the process, but you can do one anyway if you want. Expect to pay $300 to $400 for one.

Loan estimates

Part of the application process includes having your credit pulled by lenders, which they must get your consent to do. This can cost $12 to $26 and may be covered by the lender if you end up getting a loan through them. The law requires them to give you a Loan Estimate form in 3 business days after receiving your application.
The three-page form provides a quick but detailed look at the loan amount, type, interest rate, cost of the mortgage, monthly payment, closing costs, and ways to compare the loan with other loans.
The loan comparison terms are important because they can help you compare apples to apples when shopping for home loans. Look over the Loan Estimate form from each lender you’ve applied to, and you can easily compare:
  • Cost in 5 years. This includes the principal paid off at that time, and the total paid in interest, mortgage insurance, and loan costs.
  • Annual percentage rate. The APR isn’t your interest rate but is the costs over the loan term as expressed as a rate.
  • Total interest percentage. The TIP is the total amount of interest you’ll pay over the loan term as a percentage of your loan amount. The higher the number, the more interest you’ll be paying.
In the upper right corner of the form is a checkbox for how long the loan rate and closing costs are locked for, if at all. You may have a month, for example, for the terms to be valid.

5. Talk to a loan officer

All of this information should help you choose a lender. If you’re confused by anything a lender tells you, ask for an explanation.
Their fees, which we’ll go over soon, are one consideration. But so is how comfortable you are with a loan officer. You’re looking for someone you can trust and who isn’t pressuring you to take a certain type of loan that may not meet your needs.
Do they answer your questions completely? Are they patient enough to work with a first-time home buyer? Has anyone you know recommended them?

6. Begin underwriting process

Once you pick a lender, the loan underwriting process to consider your eligibility for certain loans so you can buy a new home.
This is where you may need to have patience. Everything in your mortgage application will be scrutinized. Even if you have all of the supporting documents that you think you’ll need, the loan officer may ask for more.
Your most recent bank statements or pay stubs, for example, may be needed to verify your income and amount of savings. Your credit score may be checked again to see if it has changed, so don’t open new lines of credit or make large purchases while waiting for a home loan to be approved. Mortgage insurance may be required if your down payment isn’t big enough.
Whatever the underwriting issue, try to resolve it on your end as quickly as you can so that your loan officer can complete the application review.

7. Close and get your keys

The final step is the closing date that your lender will give you if the loan is approved. Federal law requires a Closing Disclosure form to be given to you 3 business days before your scheduled closing date.
Compare it to your initial loan estimate to make sure the numbers match. If not, discuss them with your loan officer.
The Closing Disclosure form was created in 2015 to replace the HUD-1 settlement statement as the final document before borrowers sign the closing paperwork. It’s five pages long and includes such information as:
  • Loan amount
  • Interest rate
  • Monthly principal and interest
  • Loan type
  • Estimated taxes, insurance, and assessments
  • Closing costs, including cash needed to close
  • Total payments
  • Lender contact information
  • Costs
Unfortunately, there are many costs beyond the home’s price when buying a home. Many will come from your lender. Here are some of them:

Interest rate

Of course, the biggest cost of a home loan is the interest paid over the life of the loan. That’s why it’s important to shop for the best interest rate at the shortest loan terms you can afford.
A 30-year, fixed-rate loan for $250,000 at 4% interest requires a monthly payment of $1,194. Just increase the rate to 4.25% and the monthly payment goes up to $1,230.
Over a 30-year loan, the total interest paid on the 4% loan is $179,674. Adding a quarter percentage point to the interest rate adds an extra $13,072 in total interest.
One way to lower the interest rate is to pay discount points. One point equals 1% of the loan amount. For a loan of $250,000, paying one point equals paying $2,500. Lenders may offer different interest rate discounts for paying points.
Bank of America gives the example of a $200,000 loan, with an APR of 4.5% when no points are paid. Pay one point, or $2,000, and the rate drops to 4.25%. Pay two points, or $4,000, and the rate drops to 4%.
The monthly payment savings is $29.49 when paying one point, and $58.54 for two points. It would take 68 months to break even on those point costs, so it’s only worthwhile if you’re going to live in the home for more than five years.
Over a 30-year loan, paying one point would save $10,616, and two points would almost double it in the Bank of America example.

Closing costs

Most closing costs are paid by the home buyers. If you’re in a buyer’s market, however, you may be able to convince the home seller to pay some of them.
Closing costs average 2 to 5% of the loan amount. On a $250,000 home purchase, that equals $5,000 to $12,500.
Paying them out of your pocket as a one-time expense is the cheapest way to do it, though it may not seem so at the time. Closing costs can also be folded into the loan if the lender allows it, but you’ll end up paying interest on those costs through the life of the loan.
The Closing Disclosure will list what these costs are, which can include an “underwriting fee,” “origination fee” and other fees that your lender makes money from but which you may have never heard of. Feel free to ask about them and if they can be reduced.
Just a processing fee, which sounds innocuous enough and only covers the cost of processing the documentation of your application, can be from $300 to $1,500, according to Lending Tree.
Filling out a mortgage application is free, though lenders may charge you $12 to $26 or so for pulling a credit report, depending on if it’s a single or joint report. They may cover the fee if you end up doing business with them.

Insurance and ownership costs

The average cost of homeowners insurance is $1,215, according to one study. But that’s just the start of the costs you’ll have to pay as a new homeowner.
Property taxes vary by state and are based on the value of the property. Property taxes range from as low as 0.3% in Hawaii to 2.21% in New Jersey.
Other fees you may have to pay at closing or later include:
  • Annual assessment if you belong to a homeowners association.
  • Private mortgage insurance if the down payment is less than 20%. This can cost from 0.55% to 2.25% of the purchase price.
  • Government loan fees, such as 1.75% of the loan amount for an FHA loan fee.
  • Owner’s title insurance, about 0.5-1% of the purchase price. This protects you from title problems or claims made on the home after closing and lasts as long as you own the property.

Pros and cons

Applying for a mortgage won’t be the easiest thing you do in life, but it shouldn’t be the most difficult. There are plenty of resources and people to help you along the way, so seek as much help as you need.
Here are some pros and cons of applying for a mortgage.
Pros
  • The biggest benefit is that after all of this work, you’ll own a home. You’ll probably have to make monthly payments for years, but homeownership and with a fixed-rate loan you won’t have to bend to the whims of a landlord who wants to raise your rent every few years.
  • Shopping for a mortgage is also a good way to understand your finances. It will help you review your credit score, know where your money is going, how much debt you have, and how much you have in assets.
  • It will also allow you to compare interest rates and other terms from lenders so that you’re getting the best deal on something that you’ll use daily for years to come.
Cons
  • At 2-5% of the loan amount, the closing costs of a home loan can be one of the biggest downsides to buying a home.
  • It’s also a fair amount of work to complete the application process, though lenders and other professionals should be able to do much of the work for you after you provide the details of your financial life.
  • Getting approved for a home loan can take a month or so, though it can only take a few weeks if necessary. Start the process as soon as you can so that you can get through it without the rush of last-minute questions and extra costs that can come with a fast approval process.

The bottom line

If home prices haven’t sent you retreating to your rental unit, then the mortgage application process may send you back.
Try not to let a mortgage application deter you from your homeownership dreams. It can be a lot of work, and it may not be fun reviewing your credit history, but big things such as buying a new home can be worth the effort.

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