Family walking into house

How To Get a Mortgage, Step by Step

Erica Gellerman5-Minute Read
October 20, 2020

If you’re trying to understand how to get a mortgage, you might be overwhelmed with the information. What’s your first step and how do you make sure you are finding the best mortgage options for you? We have a step by step guide to help walk you through how to get a mortgage.

How To Get A Mortgage Loan In 8 Steps

Getting a mortgage can be a long process, that begins with planning a preparation. Stick with us as we walk you through the most important steps to getting a mortgage.

1. Manage Your Credit

Lenders are going to look at a number of things when deciding whether or not to lend you money. One of the big considerations is whether they trust that you’ll be able to repay the loan. They often determine this by looking at your credit history. That’s why your first step is to get your credit score in good shape.

To ensure your credit is in tip-top shape, first check your credit history to review it for any errors. You can pull your credit history for free at Rocket HomesSM. If you see any errors, dispute them – you don’t want bad data pulling down your score.

If your credit score isn’t quite where you hoped it would be, focus on making on-time loan payments and work on paying down any existing credit card balances. For additional help, read more tips for getting your credit mortgage-ready.

2. Prepare A Budget

While your lender will tell you how much they will lend you, that amount might be different from what you can comfortably afford. Your lender will base your approval on your debt-to-income ratio (DTI): how much all of your monthly debt payment is compared to your monthly gross income. Your DTI requirement will be specific to your personal situation and which type of a mortgage you’re applying for, but most lenders consider a DTI of 43% or less to be a good rule of thumb. If your DTI is higher than 43% it’s best to talk to a Home Loan Expert to discuss your best options.

If you’re using 43% as a starting point, you can prepare a budget that works for you. Depending on your situation, you can choose to build a budget where your monthly debt payment is significantly less than 43% of your gross monthly income.

When making your budget, don’t forget to factor in the cost of private mortgage insurance (PMI). A lender charges PMI when your down payment is less than 20% of the purchase price of your home.

3. Get Prequalified And Preapproved For A Mortgage

Now that you have an estimate of what your budget will be, it’s time to start the mortgage prequalification and preapproval process. When you begin house shopping, a seller will want to see that you’ll likely be able to secure funding. That’s why a prequalification or preapproval letter is so important.

Note that prequalification is a much less thorough process. It involves providing a lender with some basic income and credit information and having them estimate what you could be approved for.

Preapproval is a more thorough process where a lender not only looks at the financial information you provide, but verifies that it’s correct. Preapproval is the best way to verify your creditworthiness before you purchase a home.

4. Choose A Mortgage Loan

Once you’ve decided to buy a home you may be surprised by the number of different mortgages available. Before selecting one type, it’s helpful to understand what’s available.

Conventional home loans: This is the most common type of mortgage loan available. Requirements can be strict for your DTI and credit score to qualify. But you can get a home loan with as little as 3% down, though you’ll need to pay PMI.

FHA loans: These loans are backed by the Federal Housing Authority. You can qualify for a loan with a lower credit score and a down payment as little as 3.5% of the purchase price. These loans may have lower borrowing limits compared to conventional loans.

VA loans: These loans are available to veterans without requiring a down payment or PMI. While these loans are made by private lenders, a portion is guaranteed by the VA, allowing you to get more favorable terms.

5. Find The Right Mortgage Lender

Once you know what type of loan you’d like, it’s time to look for a lender.

Be sure to check for the interest rate charged, closing costs, the length of the loan term, any PMI changes and your total monthly payment.

Lenders generally want to see borrowers with a good credit history, stable income, down payment funds saved and a good debt-to-income ratio.

6. Apply For The Mortgage

Once you’ve selected a lender and you’ve had an offer accepted on a home, it’s time to apply for your mortgage. If you’ve already completed the preapproval process, your lender will likely have most of the documents that they need. If not, you’ll want to gather the following information:

  • W-2 forms for the last 2 years
  • Pay stubs from the last 30 days
  • Federal tax returns from the last 2 years
  • Proof of income
  • Bank statements
  • Personal ID and Social Security number
  • Explanations for fluctuations in income

7. Begin The Closing Process

Once you’ve submitted all of the documents and you’ve answered your lender’s questions, you’ll wait for closing to finalize your loan. The home closing is when the loan and the home sale become final. Your lender disburses funds to the seller, and you get the keys to your new place.

The closing process can take a long time. According to Ellie Mae, a technology company supporting lenders, the average time to close in August 2020 was 49 days.

Closing procedures will depend on where you live. In some places the closing process is complete in person with the assistance of an attorney. In other places, you won’t need an attorney.

On closing day you’ll receive your closing documents, transfer money to pay your down payment and closing costs, show proof of homeowners insurance, and make an initial deposit into your escrow account.

8. Start Making Loan Payments

Once you’re officially in your new home, it’s time to start making your monthly mortgage payments. Congratulations, homeowner!

FAQs About Getting A Mortgage

How Long Does It Take to Get a Mortgage?

The average length of time to close on a home was 49 days in August 2020, according to technology company Ellie Mae. While your preapproval process will be much faster, actually closing on a loan and purchasing a home can take a while.

That said, if you need to close faster, talk with your lender about ways you can speed up the progression. They may be able to accommodate a quicker timeline if you’ve done a lot of the work upfront with the preapproval.

Can You Get a Mortgage With Bad Credit?

If you don’t have stellar credit but you’d like to get a mortgage, there are still options available. If you have fair credit — a score of 580 or higher — you’re eligible to receive an FHA loan. If you have less than a 580 credit score, you may still be eligible, but you’ll need to have stronger housing expense ratios or debt-to-income ratios.

Should You Buy a Home With Credit or Cash?

If you happen to have a significant amount of money sitting in your savings account, you may consider buying a home with cash. There are some definite upsides to purchasing a home in cash. Your offer may look more attractive to a seller as you won’t need to wait to be approved for a mortgage. In addition, you can avoid paying interest and closing costs. And you won’t need to pay for an appraisal or wait the average 49 days to close on a loan.

That said, if buying a home is going to leave you strapped for cash or unable to make other investments, it might not be the best idea.

Bottom Line

There are a number of steps required to get a mortgage and buy a home. But if you’re organized with your information, spend time searching for a lender, and find the right mortgage for you, the process will be much easier. Learn more about the home buying process by visiting our home buyer’s guide.

Get the right home loan for you.

Erica Gellerman

Erica Gellerman is a CPA, MBA, personal finance writer, and founder of The Worth Project. Her work has been featured on Forbes, Money, Business Insider, The Everygirl, The Everymom and more.