How to Apply for a Mortgage: A Step-by-Step Guide

Written by Elijah BishopReviewed by Anders Skagerberg, CFP®Updated: 15th Apr 2022
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You’ve decided to buy a home. Now, you need to get a mortgage. But the challenge is that getting a mortgage comes with a lot of twists and turns.

And with the average mortgage process taking around 45 days (from application to closing), preparation is key.

When applying to get a mortgage for a new home purchase, it is a good idea to understand all you need to know about the types of mortgages, eligibility requirements, origination fees, and average monthly payments before starting the actual homebuying process.

Let’s look at a typical mortgage application process and what you need to know to make your mortgage application successful.

What Are Mortgage Lenders Looking for in an Applicant?

It is common for the best mortgage lenders to evaluate your loan application using specific parameters when applying for a loan.

These parameters or factors are typically referred to as IPAC within the mortgage industry. IPAC, which is an acronym that stands for Income, Property Type, Asset, and Credit.

Let’s take a closer look at these factors and the role they play in a mortgage application.

Income

Just like any other loan, your incomes play a considerable role in your mortgage approval process.

One of the reasons why mortgage lenders consider your income when you apply for a home loan is that your income tells the lender that you have enough cash inflow to repay the loan.

While lenders require no set income amount to enable you to buy a house, it is expected that your income should be able to cover your mortgage payment and other living expenses.

For example, you can’t expect your lender to approve a $700k mortgage loan for you while earning a gross income of $2k monthly.

Your lender will request copies of your employment history, household income, and proof of other external income sources when looking at your income.

Property Type

Your potential property type determines the type of mortgage and interest rate you get. This is because each property type comes with its level of risk to the mortgage lender.

So, it is common for loans meant for single-family homes to come with lower interest rates and more lenient underwriting standards than investment property mortgages.

When applying for a mortgage, you’ll notice that the down payment, credit score requirement, interest rate, and buyer requirements differ across various properties.

So, whether you are taking out a loan to finance the purchase of a townhouse, co-op, condominium, or a traditional single-family home, you must find out how your property choice will influence your mortgage application and fees.

Assets

Sometimes referred to as cash reserves by jumbo loan lenders, mortgage lenders will want to know if you have enough money in hand to cover the loan repayment.

This assures your lender that you can still pay the loan if you run into a financial issue or lose your job.

Often, online mortgage lenders will request to review your assets or savings. Your lender will often request that you submit information regarding your savings account, retirement accounts, and taxable investment account.

Depending on the type of the loan, your lender may require that you have at least six months’ worth of your potential mortgage payment in hand.

Credit

In the mortgage sphere, credit is vital. Your credit score and credit history determine if you are eligible for a type of mortgage and the terms you receive when applying for one.

A high credit score tells your lender that you are a responsible borrower, while a low credit score shows that you are a borrower with poor repayment habits.

While there is no set-in-stone credit requirement, the credit score required differs across loan programs.

For example, government-backed loans like FHA Loans, VA Home Loans, or USDA Loans require a credit score of 580-620. Others like non-conforming jumbo loans may require 700 and above.

If you hope to get a reasonable interest rate or access to better loan terms, you should consider building your credit before applying for a mortgage.

>> More: How to Choose the Best Mortgage

What Documents Do I Need to Apply for a Home Loan?

Getting your documents ready before applying for a home loan is one of the surefire ways to speed up your mortgage process.

When applying for a mortgage, it is common for mortgage lenders to request specific documents to verify your eligibility for a particular loan. Below are some of the documents you’ll need when applying for a home loan:

Proof of Income

Here are some documents underwriters (the person that reviews your documents) evaluate to verify your income:

  • Last 2 years of federal tax returns
  • Recent W-2s (going back 2 years) and recent pay stubs
  • 1099 forms and profit and loss statements (if you’re self-employed)
  • Divorce decree or other legal documentation verifying that alimony or child support payments will continue for at least 3 years following the mortgage application and proof of at least 6 months of regular payments before application

Please note that gaps in employment, frequent changing of jobs, or an unsteady income may raise a red flag for most underwriters.

You may need to reassure your lender about the gaps in your employment history and the reasons for such.

Proofs of Assets and Liabilities

Lenders want to ensure that you can afford to continue making your mortgage payments, mortgage insurance, and closing costs even if you run into some financial hiccups.

Here are some documents your lender may ask for:

  • Recent statements from any account (for example, checking or savings accounts, investment portfolios, trust accounts) with readily available funds, going back at least 60 days or the most recent quarterly statement
  • Most recent retirement account statements
  • Proof, such as a copy of both the check and the deposit slip, that gift funds are in your account
  • Signed letter from gift giver that includes a statement verifying that no repayment is expected
  • Documents surrounding the sale of assets – proof of ownership, independent verification of the asset’s value, evidence of transfer of ownership (such as a bill of sale and something, such as a deposit slip, showing that you received the proceeds)

Your lender will also look at your liabilities and existing debts like student loans, auto loans, and other debts to determine how much of your income you spend on debt repayment.

If you want a speedy mortgage underwriting process, you should be ready to present your lender with the above documents.

Credit Documentation

At this stage, you’ll need to provide your lender with a written or verbal permission to pull out your credit report.

Your lender will check your credit score, credit history and determine if you’re creditworthy.

For most mortgage loan programs, if you have a negative remark (like bankruptcy or foreclosure) on your credit report, you may need to wait for a certain amount of years before applying for a mortgage.

However, if the cause of the negative remarks were extenuating (outside your control) circumstances, there are few things you can do to prove to your lender.

  • Documents that confirm the event, such as medical bills or a layoff notice
  • A letter of explanation that explains the documentation provided and illustrates what happened and why you couldn’t resolve the situation without taking a credit hit

In addition, if you’re currently a renter, lenders may require you to provide proof of rent payment for the last 12 months, which is usually verified through a bank statement, canceled check, or a call to your current landlord.

How to Apply for a Mortgage (Step-by-Step)

When you apply for a mortgage, you are usually assigned a dedicated loan officer to guide you through the entire mortgage journey.

And as a borrower, your sole duty is to provide your lender with the correct document and present a robust application to improve your chances of getting an affordable mortgage interest rate and options.

To apply for a mortgage the right way and increase your chances of getting a great mortgage deal, here’s what you need to know at each stage of the process.

#1. Shop Around and Compare Rates

Time Estimate: A few minutes or at best an hour of your time

When applying for a mortgage, the first-rate you receive isn’t always the best. And since mortgage rates are not set in stone, it is common for lenders to adjust the interest rates and fees they offer to borrowers.

That means that a lender you’re considering may still be able to provide you with a lower interest rate than the one they are advertising on their website.

To get the best rate, you’ll need to shop around and compare rates among lenders. Shopping around lenders help you decide whether you are getting the best mortgage deal or not.

For example, a 2.35% rate and $4,000 in mortgage origination feesmight seem like the best offer if it’s the first quote you’ve gotten. But another lender might be able to offer you 2.0% and $3,200 in fees.

Like in our above example, you won’t know about the second offer if you decide to settle for the first offer.

That said, you should shop around lenders within the same 14-day period. This is because too much hard inquiry on your credit can hurt your credit score, but it only counts as a single inquiry if done multiple times within 14 days.

>> More: Best Online Mortgage Lenders

#2. Apply for a Mortgage Pre-approval

Time Estimate: A few minutes

Many first-time homebuyers make the mistake of either applying for a mortgage late or not getting pre-approved before they begin their house-hunting journey.

But the question is, how late is too late to get pre-approved? If you’re already looking at a house, then you’re already late in the mortgage game.

Mortgage pre-approval is a way to determine how much home you can afford or how much a lender is willing to borrow you based on certain factors.

When you apply for a mortgage preapproval, your lender will look at your finances — bank statements, tax returns, pay stubs, credit reports — and determine how much home you can afford.

More importantly, getting a mortgage pre-approval letter from a lender gives you leverage in your home buying journey.

Not only does it prove to sellers that you have a lender willing to back your offer, but it also gives you leverage during a multiple offer situation.

#3. Compare and Research Properties

Time Estimate: A week or two depending on your local market

Once you’re confident about the amount of house you can afford, the next thing is to hit the market searching for a home that fits your home buying budget.

At this point, you should work with a local real estate agent, especially if you’re a first-time homebuyer.

A local real estate agent can help you find homes that fit your budget and expectations.

More importantly, during your house hunting journey, your chosen real estate agent will assist you with comp data analysis of the location to help you determine the value of homes in your desired area.

#4. Make an Offer on a House

Time Estimate: A few weeks to a few months

Now comes the best part — you’ve found a house that fits your budget, making an offer is your next big step.

At this point, your real estate agent will help you send in your offer, which spells out the purchase price, a closing date, and any contingencies to the contract.

Depending on the local real estate market, you may have to do a bit of negotiation and bidding war before the seller arrives at a final price. Your mortgage pre-approval might come in handy to give you leverage.

Once the seller accepts your offer, you’ll sign a purchase and sale agreement, sending you one step closer to homeownership.

#6. Mortgage Underwriting

Time Estimate: 24-48 hours

When filling a mortgage application for pre-approval, it is common for lenders to request documents regarding your employment, income, assets, credit history, and other financial information.

During the mortgage underwriting process, these documents are closely evaluated and verified.

Your lender will also need to verify your property details. This often involves conducting an appraisal, verifying home title, and any other state-required home inspections.

At the end of the underwriting process, you will receive a closing disclosure from your lender. A closing disclosure reveals all there is to know about your loan, including your mortgage payments, down payment, interest rates, and closing costs.

More importantly, compare the final numbers to your loan estimate and discuss any discrepancies with your loan officer.

#7. Close on Your Loan

Time Estimate: 24 hours or less

Once you’ve approved your loan, it is time to close on your loan. At closing, you’ll have the last chance to decide whether or not you are going ahead with the loan.

If you choose to go on with the mortgage, you should be ready to sign a shitload of paperwork.

Mortgage closings are usually held at the settlement, escrow, or title company you are working with.

Your lender will request that you come with the closing disclosure, closing costs, and the down payment to the closing venue.

It would be best to bring a cashier’s check to cover the closing costs and down payment.

If you worked with a real estate agent, it is common for your realtor to attend the closing on your behalf.

#8. Make Monthly Payments

Now that you’re done with your mortgage application process, the next step is to start paying down the loan.

Your mortgage payment cost will be listed in your closing disclosure which you must have received three days before the closing date.

What Should You NOT Do Before Applying for a Mortgage?

As a mortgage loan applicant, you don’t want to do anything that will jeopardize your chances of getting a mortgage.

Making any of the following mistakes may negatively impact the amount of financing you receive or even lead to total denial of your mortgage application.

With that in mind, here are five things you should not do before applying for a home loan:

Don’t apply for a new loan or make any large purchases

Avoid obtaining credit for any significant expense, like a car, boat, truck, or iPhone. Taking on a new loan will most likely increase your debt-to-income ratio, which may not sit well with most lenders.

Don’t switch jobs

Mortgage lenders love consistency and want to see a steady employment history. Often, mortgage lenders will require regular employment for at least the past two years.

If you have unexplainable gaps in your employment history, a whole new career change, or a decrease in your income, you may hit a roadblock during the underwriting journey.

For most lenders, a new job in your current industry or one with a higher salary may appear appealing to a lender than a new job in a whole new industry.

Don’t miss out on payments

This relates to your credit because a continuous missing out on payment will negatively impact your credit score.

And since your credit score is a big piece of your mortgage application, you don’t want to give lenders a poor credit score.

If lenders find out that you have multiple late payments on your credit report, they will also assume that you will be irresponsible with your loan repayment.

Don’t max out your credit cards, and don’t close them

One of the easiest ways to hurt your credit score is by exceeding your credit limits or swiping your card too often.

Another factor that affects your credit is your credit utilization ratio (debt-to-credit ratio). Your credit utilization ratio is the amount of credit you have used in line with your credit limit.

For example, if you have used up $4,000 from your credit card with a $7,000 card limit, your debt-to-credit ratio is 57.14%.

Ideally, most lenders require that you keep your credit utilization ratio at 30% or below.

What Salary Do You Need to Qualify for a Mortgage?

Even though it is common for lenders to evaluate your income sources when applying for a mortgage, no set income requirement is needed to qualify for a mortgage.

Instead, most lenders will focus on your debt-to-income (DTI) ratio and your ability to handle the required mortgage payments more than the amount you take home each month.

In the aspect of DTI, most lenders prefer a DTI ratio of 50% or less. So, if your DTI ratio is higher than 50%, you may have a hard time getting a mortgage.

According to financial expert Dave Ramsey’s 28/36 rule, you shouldn’t spend more than 28% of your monthly gross income on housing, including principal, interest, taxes, and insurance (PITI).

So, for example, with the current median home price in the U.S. at $284,600, if you make a 20% down payment, you can expect to pay around $1,200 monthly on mortgage payments. If we go by the 28% rule, your monthly salary should be around $4,285 or higher.

4 Tips for Getting a Home Loan

Getting a home can sometimes be a challenging experience for prospective homebuyers. But it doesn’t always have to be so.

By adhering to the following tips, you can make your mortgage process and homebuyer experience better.

Check your credit score

Finding out your credit score should be the first thing you do before you buy a house.

This is because your credit score plays the most important role in determining the type of loan you qualify for, how much you can receive, and the loan terms.

You should check your credit at least 3 months before you begin house hunting. By reviewing your credit score early, you can either dispute any errors or build your score.

>> More: What Credit Score Is Needed to Buy a Home? 

Compare Loan Estimates

When shopping for a home loan, you don’t have to settle for the first lender you speak to. You might get a better mortgage offer from one lender than you do from another.

An easy way to get an excellent loan offer is to compare loan estimates across lenders.

Remember that your loan estimate gives you a preview of what to expect from a lender regarding the loan terms, mortgage rates, and fees.

Understand DTI ratio

If you hope to get a suitable mortgage, you must understand specific mortgage terminologies and their role.

One of such terminologies is the debt-to-income ratio (DTI) and loan-to-value ratio. When applying for a home loan, you should be aware of your current debt status and how it can impact the interest rate you receive.

If your DTI ratio is relatively high, take some time to reduce it by paying off high-interest debts or not taking on additional credit before applying.

Pick the Right Mortgage

The type of mortgage you choose can either make or mar your home buying experience.

Before applying for a home loan, research the available mortgage types and their requirements in line with your present housing and financial situation.

It would help if you discussed with a mortgage professional for proper guidance.

Bottom Line: How to Apply for a Mortgage

Applying for a mortgage may seem like a challenge when done without the proper information to guide you.

By understanding the various steps and requirements expected of you by lenders, getting a home loan will become a walk in the park.

Before applying for a mortgage, you should consider working on your credit, reducing your debts, saving for a down payment, and preparing the necessary documents.

More importantly, shop around lenders to find the best mortgage offer that suits your needs.

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Elijah Bishop
Elijah Bishop

Elijah A. Bishop is a Senior Personal Finance Writer who has been writing about real estate and mortgages for years. He has a Bachelors of Arts Degree in Creative writing from Georgia State University and has also attended the Climer School of Real Estate. He also holds a realtor license and has been in and out of the US mortgage industry as a loan officer. Bringing over 15 years of experience, Elijah produces content that analyzes ethnicities, race, and financial well-being. His areas of expertise are mortgages, real estate, and personal loans.