Buying a home can be intimidating, in part because of the loan process. Nobody teaches you how to get a mortgage in school, and it’s helpful to know what to expect before you begin. Being prepared can help you manage your expectations and prevent problems.
Here’s a step-by-step checklist of how to apply for a mortgage, including:
- Reviewing your credit
- Preparing documentation
- Submitting an application
- Comparing offers from different lenders
- Underwriting and approval
Check Your Credit
Check your credit long before you apply for a home loan. Federal law allows you to view your credit reports for free, and it’s critical to understand what’s in your reports. Any errors may lower your credit score, resulting in a denied application (or lenders offering a higher rate than is necessary).
If you find errors in your credit reports, fix them as soon as possible. If speed is critical, you can potentially use rapid rescoring to address problems and get an updated credit score in just a few days.
Once you decide to apply for a home loan, avoid any activity that may derail the process. Ask your lender for guidance before making big financial decisions or changing bank and investment accounts.
It’s wise to delay applying for new loans while you’re in the process of buying a home. Lenders evaluate your loan application assuming they know how much you owe and what monthly payments you’re responsible for. A new loan changes your finances, so lenders need to reevaluate everything. Wait until after closing to buy that car or get a new credit card.
Be careful about moving money between accounts. Lenders will ask for copies of bank statements and other financial statements. If there’s a significant deposit into your account, you’ll need to explain where the money came from. Lenders want to ensure that, for example, you didn’t take on debt that they’re not aware of. Even if you’re moving cash among your own accounts, you need to provide an account history of every account involved.
Sometimes you need to change positions, and life changes (like relocation) may coincide with new employment. Life is easier for everybody if you wait until your loan closes before changing jobs, but if that’s not possible, discuss the situation with your lender.
Working with several lenders is wise. Doing so allows you to compare offers and get the best deal possible. At the same time, you learn about mortgage loans while evaluating the pros and cons of each proposal.
Three lenders should be sufficient to provide enough variety and competition. You can borrow from a variety of sources, and you might start with the following:
- A mortgage broker (ask friends and acquaintances for suggestions)
- An online lender
- A local bank or credit union
- A national bank
Applying with several lenders should not hurt your credit. Credit scoring models allow for comparison shopping, and your score should not suffer as long as you apply within a 45-day window.
To apply for a loan, you need to document your finances. You’ll find out exactly what you need as you go through the application process, but it’s never too early to start gathering documentation. You need things like:
- Proof of income (pay stubs, W-2 forms, 1099 forms)
- 60 days’ worth of bank and investment account statements (or at least your username and password so you can get them when you need them)
- Financials for any self-employment income (profit and loss statements, tax returns, and more)
- Details on any other sources of income
Give yourself a few days to get this information. You may need to request documents by mail, find old passwords, and wait for others to help you get what you need.
Submit an Application
Once you’ve narrowed down the field, apply with each lender. That’s the only way to get a detailed, legally-binding quote. Plan to spend roughly 45 minutes on your first application, and the next two applications should go more quickly.
You’ll need to provide your current address as well as any addresses you lived at during the previous two years. Lenders typically also want to know how much you spend on the housing so they can compare your current expenses to a new loan payment.
Explain your income, including details about how you earn that income. At this point in the process, a total income amount is not sufficient—you need to break it down. For example:
- Base income (salary or wages)
- Earnings from overtime (and if you expect overtime to continue)
- Bonuses and commissions
- Investment income
- Other sources of income (rentals, freelancing, etc.)
Lenders evaluate your credit, income, and other factors and provide you with a Loan Estimate. That three-page document describes the essential components of your loan, and it’s handy for comparing lenders.
Lenders may quote different interest rates and closing costs, but a Loan Estimate helps to filter out most of the noise and show you what really matters. For example, the document highlights:
- The interest rate on your loan
- Any closing costs required
- Whether or not your rate is fixed
- The monthly payment
- Cash required to close
- How much principal you pay off over five years
Compare each section of the Loan Estimate carefully and ask lenders about anything you don’t understand.
Choose a Lender
Once you understand the features of each loan, choose the option that works best for you. As you evaluate the alternatives, feel free to contact lenders, and ask as many questions as you want. If you don’t get satisfactory answers, move on to a different lender. Eventually, you should determine which option is superior and which lender you’re most comfortable with.
Notify the lender that you’d like to move forward, and commit to any fees required to process your application.
Request an Appraisal
After selecting a lender, it’s time to pay any application-related fees, and a home appraisal is one of them. Lenders want a disinterested third party to evaluate the property and estimate the market value. This is a requirement for most loans, and in some areas, appraisers can be extremely busy, so it’s wise to approve payment to an appraiser as soon as possible.
While you’re at it, get the home inspected. An appraisal protects your lender by having somebody estimate the market value of the home. But appraisers don’t take a close look at the structure and systems in your home—things you’ll have to pay for if they fail.
Respond to Inquiries
Lenders review your application and verify the information you provide, and that process can take several weeks. During that time, it’s critical to answer questions and provide documentation as quickly as possible. Lenders need that information to continue processing your application.
This process can be frustrating. You may have to provide the same information in a variety of different ways, and it may seem like lenders are questioning everything you tell them. But it’s actually a good thing: Lenders take a significant risk by making large loans, and regulations require them to verify that you can repay your loan. The fact that they’re asking questions means they’re trying to approve your loan.
Keep copies of everything you provide, as you may need to re-submit the documentation or start over with a different lender.
Clear to Close
Once you provide everything to your lender, an underwriter conducts a final review. After determining that you meet all of the requirements (you submitted documentation, met minimum standards, paid any fees due, and more), your loan is clear to close. That’s great news, but it’s still critical to avoid doing anything to derail the process, like applying for new loans before you actually close.
This is the event you’ve been working toward. At closing, you finalize documents to fund the loan and complete your real estate purchase.
Closing can take anywhere from 45 minutes to several hours, and it’s wise to take your time at closing. Read every document before you sign, and verify that the loan you agree to is the same loan you expected based on your Loan Estimate. Don’t be afraid to ask questions during the process—you’re making a significant commitment at closing.
After closing, you’re ready to move in and begin your new life in a new home.