Ready to buy a house? If you need a mortgage to finance homeownership, we’ll walk you through the process of getting a mortgage in eight, easy-to-understand steps.

What is a House Mortgage?

Before we begin, what is a mortgage exactly? A house mortgage is a type of loan used to purchase a home or property. After the lender approves the home loan, you’ll sign an agreement to repay the loan by making a set number of monthly payments, plus interest, usually over many years to make it affordable.

How to Get a Mortgage

Before you take out a mortgage, it’s important to understand what’s involved so you’re prepared for each part of the process. For example, you’ll want to have your financial information organized and ready before you apply. That way, there are no surprises or delays. Let’s dive into the eight steps to getting a mortgage loan.

1. Check Your Credit Score

Your credit score helps your lender predict how likely you are to repay debt. It’s calculated using data from your credit reports. These reports include your payment history, the amount of debt you have, and the length of your credit history.

You actually have three credit scores from three different credit reporting agencies (Experian, TransUnion, and Equifax). It’s important to check all three because lenders may use all of them in their review.

There are a few different ways to obtain your credit score.

  • Credit Card Companies – Some companies provide a credit score for free to their customers, so you may want to check yours.
  • Credit Reporting Agencies – You can contact Experian, TransUnion, and Equifax directly to purchase your credit score. Some agencies offer them packaged with other services, so be aware of what you’re buying.
  • Credit Counselors – Reputable nonprofit credit counselors and HUD-approved housing counselors can often provide your credit scores too.
  • Credit Score Service – Lastly, there are a variety of companies like Credit Karma and Credit Sesame that offer a free credit score, but you have to be careful you’re not signing up for other services (like credit monitoring) at the same time. Just be sure to read the fine print.

In general, a credit score above 720 results in the best interest rates for a house loan according to Melanie Jannuzzi (NMLS 198534) of Trident Mortgage, part of the BHHS Fox & Roach family of companies.

If your scores are lower than you’d like, or you suspect there’s an error, you’ll need copies of your credit reports from each credit reporting agency. Federal law allows you to get a free copy of your credit report every 12 months. Head to AnnualCreditReport.com to request them. Then, review them closely and dispute anything that’s inaccurate.

If you still have bad credit, you can pay down your debts, make on-time payments, and simply allow time to pass to demonstrate a longer credit history.

2. Determine Your Budget

Next, you’ll need to figure out how much of a house mortgage you can afford.

You can begin by assessing your debt-to-income ratio. Banks want to know that you have enough disposable income to make the mortgage payment. For example, if you have student loans and car payments that add up to $600 per month, and your take-home pay is $4000 per month, your DTI ratio is 15%. That’s well below the preferred ratio of 36% or less, so it looks good from the lender’s perspective.

However, the amount your lender approves for a mortgage might be unrealistic when you take a closer look at your expenses. After you subtract costs like groceries, daycare, and cell phones (plus new expenses like property taxes and insurance), you might find the approved mortgage amount would make your monthly payments unaffordable. That’s why it’s important to document all your expenses. Once you do that, you can calculate the maximum you want to pay each month.

Keep in mind that variables like the interest rate, term, and loan amount can change the mortgage payment significantly. By using a mortgage calculator, you can better understand the impact of factors like a better credit score, longer loan term, or larger down payment.

3. Gather Documentation

Prior to getting a mortgage loan approved, the lender must verify your financial status. To do this, you’ll need to provide them with some documentation. Start to gather:

  • Proof of income and assets (This might include your pay stubs, bank records, or investments)
  • List of debts (You’ll need to share any revolving debt, such as credit cards or car payments)
  • Tax documents (Lenders usually require one to two years of tax returns)
  • Credit history (Your credit reports)

Your mortgage lender will explain exactly what they require, but you can get a headstart by organizing your financial and tax documents before you apply.

4. Choose a Mortgage

There’s more than one kind of house mortgage, so it’s important to understand the differences before you apply. Let’s talk about how to find mortgage types that work for your situation.

  • Conventional Mortgages – These are backed by the private lender, so if you don’t make your payments, the lender loses money. For that reason, you’ll need a good credit score and not carry too much debt relative to your income. But you’ll get a lower interest rate than other mortgage types.
  • Jumbo Mortgages – Jumbo mortgages are even more stringent because homeowners are borrowing more (roughly half a million depending on the area). Interest rates are usually similar to conventional mortgages or slightly higher.
  • Government-Insured Mortgages – These are less risky to the lender because the government guarantees all or part of the loan if the homeowner can’t pay. Examples include the FHA, VA, and USDA programs. Credit score and down payments can be lower, making it easier for first-time homebuyers to qualify.

You’ll also want to consider whether you want a fixed-rate or adjustable-rate mortgage. Fixed-rate mortgages have the same interest rate for the entire life of the loan. However, in an adjustable-rate mortgage (ARM), the interest rate varies. There’s often a low “teaser” rate, followed by periodic rate adjustments based on an index that reflects the lender’s borrowing cost on the credit markets.

5. Pick a Lender

So, now that you know what mortgage you need, where do you get a mortgage? We’ve used the term “lender” generically in this article, but there are actually a few different kinds, including commercial banks, credit unions, and mortgage loan companies. Some homebuyers engage a mortgage broker, who can help you find the best lender.

To narrow down your lender choices, consider the following:

  • What type of home loan are you seeking (conventional, jumbo, government-backed)?
  • What are their interest rates and terms, and how do they compare to others?
  • What are their closing costs, and how do they compare to others?
  • Would you prefer to have a local representative?
  • What is your credit score?

The pre-approval process, which we’ll describe next, will help you compare your top lender choices using your actual financial and credit information.

Traditional Banks vs. Mortgage Companies

To help you decide, let’s take a closer look at the differences between traditional banks and mortgage companies.

Banks (and credit unions) offer mortgage loans along with other banking products like checking and savings accounts and business loans. They have the benefit of a local presence and may have discounts for existing customers. However, they often have stricter lending standards because they’re subject to federal compliance and reporting laws. This could make approval more difficult if you have bad credit.

Mortgage companies offer a larger variety of loan options and have more leeway for borrowers with damaged credit. They’re specially trained in mortgage lending, can be easier to negotiate on terms, and are often faster to approve.

6. Get Pre-Approved

One of the most important steps to getting a mortgage loan is pre-approval. Even if you haven’t found a house yet, the lender will verify your financial and credit status, then provide the terms of your potential mortgage – the maximum amount you can borrow, interest rates, and closing costs. A pre-approval typically lasts 30-90 days.

Just keep in mind that there’s a difference between pre-qualification and pre-approval. Pre-qualification uses your self-reported information, so there’s no credit check. But you need to be confident that the financial and credit information you’re providing is accurate. Otherwise, the mortgage terms could be different when you apply.

You can get pre-approved by more than one lender – and it’s a good idea to compare rates. Just do them all within a two week period. That way, your credit checks only count as one and it will have less impact on your credit score.

In addition to helping you determine your budget, getting pre-approved is a strong signal to sellers that you’re serious and have your finances in order.

Just remember that once you’re ready to buy, you’ll still need to go through underwriting before you get final approval. (That’s step 7!) It’s important to avoid any large purchases or new credit applications during this time because it could change your eligibility.

7. Start the Underwriting Process

Once the seller accepts your offer and you’re ready to go, the mortgage lender will begin the underwriting process. In short, this is how the lender decides if the risk of offering a home loan to you is acceptable. The underwriter will evaluate:

  • Your credit – What is your score? What is your debt-to-income ratio?
  • Your income – How much have you earned in the last two years? Are you gainfully employed or is your business profitable?
  • Your assets – Do you have other resources that would help you make your mortgage payments, like savings, stocks, or bonds?
  • Your home’s value – Does the appraised value of the home match the mortgage amount?

8. Close on Your Home!

Your journey to getting a mortgage loan is finally at an end. The closing is the last step in financing your home.

While it’s usually associated with signing lots of papers, there are a few more important steps. You’ll need to provide proof of homeowners insurance and a certified or cashier’s check to cover the down payment, closing costs, prepaid interest, taxes and insurance. And, depending on your loan terms, you may need to set up an escrow account to cover property taxes and homeowners insurance, in addition to your monthly mortgage payment.

How Can a First-Time Homebuyer Get a Mortgage?

As a first-time homebuyer, you might be wondering if the steps to getting a mortgage loan differ.

The steps will remain the same, but there are a few additional financing options to investigate. For example, you can find first-time homebuyer grants in your state by going to the website of the U.S. Department of Housing and Urban Development (HUD). You can also check your local county website for more first-time homebuyer programs and down payment assistance programs. Another helpful resource is the Down Payment Assistance Resource, which has a searchable list of programs.

Summary

We hope this eight-step guide has helped you learn how to go about getting a mortgage. The more you know ahead of time, the smoother the process will go.

Have more questions? The professionals at Trident Mortgage are happy to help you through the home buying process.