Mortgages

How to get a mortgage: 10 steps to homeownership

By
Social Links for Mary Beth Eastman ,
edited by
Social Links for Reina Marszalek
Updated Aug. 7, 2023, 1:28 p.m. ET
A happy couple buys their first home.
Shutterstock

Getting a mortgage isn’t exactly easy — but it doesn’t have to be overwhelming, either. The best way to learn how to get a mortgage is to take it one step at a time.

Begin by reviewing your credit history and learning what lenders are looking for. Along the way, you’ll decide on a budget, pick out a real estate agent, and make an offer on a home. If all goes well and your mortgage application is approved, you could be closing on your home in a matter of weeks.

Here are the 10 steps to getting a mortgage, so you can feel prepared and capable when you’re ready to begin the process.

1. Check your credit

The first step to getting a mortgage is checking your credit report. The information in your credit report will be visible to lenders, who will use it to decide whether to loan you money for a home. It’s also the basis for your credit score.

You could have trouble qualifying for a mortgage if your credit score is too low. Ideally, you should have a credit score in the mid-600s to qualify for a mortgage, and a score in the mid-700s to lock in a competitive rate. If your credit score needs improvement, there are some steps you can take to raise it.

How to improve your credit

Several different factors affect your credit score. To improve your credit, make a few small improvements in the following areas:

  • Get current: Get caught up on any late or delinquent accounts.
  • Pay on time: Making your payments on time is an important part of your credit score. Try setting up reminders or automatic payments so you don’t accidentally miss one.
  • Keep your balances low: Pay down your balances to decrease your credit utilization, or the amount of available credit that you’re using.
  • Hold off on new accounts: If you know you’ll be shopping for a mortgage soon, skip the new car loan or credit card account if possible. 

2. Set a budget

When setting your budget for a new home, consider your income compared to your monthly debts. This is your debt-to-income ratio (DTI). That is, it’s the amount of money you owe, divided by the amount you bring in before taxes. Lenders typically prefer that you have a debt-to-income ratio of about 36% or below. This reassures them that you can pay your bills plus a mortgage, too.

For example, suppose you earn a monthly income of $6,000 before taxes. To have a DTI of 36%, you’d need to keep your debts — mortgage included — to $2,160 a month or less. 

3. Save for a down payment

Your down payment is the amount you can pay for the home in cash, instead of with a home loan. The more you can put down, the less you need to borrow. That can save you money in the long run.

Lenders traditionally like to see a down payment of 20% or more. On a home that costs $516,500 (the average U.S. sale price in the first quarter of 2023), a 20% down payment would be $103,300. 

But you don’t necessarily have to have six figures in the bank to buy a house. You may qualify for a loan that requires a much smaller down payment. For example, if you’re approved for a Federal Housing Administration (FHA) loan, you could make a down payment of just 3.5%. On a $516,500 home, that would be $18,078.

4. Research and choose the right mortgage

There are many types of loans to choose from, each with its own requirements and advantages. 

  • Government-backed: FHA and Veterans Affairs (VA) loans are two examples of loans backed by the government. Government-backed loans often have less stringent credit requirements and lower down payment options and can be a great fit for first-time homebuyers.
  • Conventional: A conventional loan is a non-government-backed loan, and typically has stricter credit requirements than government-insured loans. 
  • Fixed-rate: These mortgages offer a fixed interest rate that stays the same over the length of the loan, making it easier to plan your finances.
  • Adjustable-rate: With an adjustable-rate mortgage, your rate may change periodically with market conditions, but the introductory rate is usually favorable.
  • Jumbo: A jumbo conforming loan exceeds the limit for conventional loans, which is $726,200 in most areas. A jumbo non-conforming loan exceeds the conforming jumbo limit, which can be up to $2 million. Jumbo loans are useful if you’re buying larger or more expensive homes.

5. Choose a lender

The next step is to choose a mortgage lender. Lenders can vary quite a bit in the types of loans they offer and the kinds of borrowers they work with, so it’s important to find the right fit. There are different options to choose from, such as mortgage brokers, direct lenders, and mortgage lenders. Each lender offers a different interest rate and annual percentage rate (APR), so shopping around is the best way to find the most competitive offer. 

6. Get pre-approved

When you find the lender you like, it’s time to get pre-approved. Pre-approval is an important step in the mortgage process, providing you with a pre-approval letter you can show sellers to prove you have a mortgage offer and are ready to buy.

Pre-approval can involve checking your credit report. You can get multiple loan pre-approvals and they’ll only count as a single credit inquiry if you do all of your mortgage shopping within a 45-day period.

7. Find your dream home

Finally, the fun part: finding your dream home. A licensed real estate agent or broker can help you house-hunt effectively, and they’ll represent you in negotiations with the seller when you find a home you’d like to make an offer on. 

Choosing the right broker is key to finding the right home.

“Do not try to do it yourself. There is simply too much to know,” said Robert Elson, a real estate agent with Coldwell Banker Warburg.

“Only a broker who thoroughly knows your area and home of choice will be in a position to guide you through the process of bidding on and negotiating on a home”, Elson added.

8. Submit your application

When you’ve found a home and you and the seller have agreed on a sales price, you can submit your official mortgage application to the lender. 

At this point, the lender will pull a hard credit report to verify your credit history. If you’re applying with someone else, such as a spouse, the lender will pull their credit history, too. Hard credit pulls do affect your credit score, but the effect should be small and short-term.

You also may have the option to request a rate lock, which “locks” in the interest rate at the time of your application (although there may be a fee for this).

9. Start the underwriting process

Once you’ve submitted your application, the mortgage underwriting begins. This is a slow and careful process to make sure that everything you’ve entered on your mortgage application is true, and that the home meets the lender’s standards. The lender’s goal is to reduce risk as much as possible.

During underwriting, you’ll probably be asked to provide documentation that shows how much you earn, such as W-2s, bank statements, or tax returns. You’ll also need to provide proof of identity, such as a driver’s license, and your Social Security number.

10. Prepare to close

The underwriting process typically takes a few days to several weeks to complete. When the lender is satisfied that the loan is ready to proceed, it’s time for closing. Closing day is when you settle the transaction, transfer the deed, and finalize the mortgage. Get your pen ready, because there will be a lot of legal documentation to sign.

You’ll also need to have the funds available to cover the closing costs, which you can usually pay with a cashier’s check or wire transfer. Closing costs can include:

  • Appraisal fees
  • Down payment
  • Mortgage insurance, if necessary
  • Prepaid home insurance
  • Prepaid, prorated mortgage interest
  • Title insurance and other title fees

The rule of thumb is that closing costs will typically be about 3% to 5% of the loan amount, but the Closing Disclosure you receive from your lender will spell out the specifics.

Calculating the cost of your mortgage

To avoid any unpleasant surprises, you can calculate the total cost of your mortgage ahead of time. 

A mortgage calculator can help you figure out the costs for the kind of mortgage you want. For example, with a fixed-rate home loan, your interest rate will stay the same over the life of the loan, making it fairly simple to calculate your costs. Suppose you’re looking at a fixed-rate, 30-year, $400,000 loan, with an interest rate of 6.61% (the national average as of March 2023). You’d pay $2,629 per month in principal and interest.

If you chose a 15-year fixed-rate loan instead, your monthly principal and interest payments would be $3,390, or $761 more per month than with a 30-year loan.

How to qualify for a mortgage loan

Here’s what lenders generally look for when deciding to approve a loan:

  • Stable income: Lenders like to see that you’ve had steady employment and a dependable income.
  • Good credit: You’ll get the most favorable rates if your credit score is in the mid-700s or higher.
  • A low DTI: Lenders like to see a low debt-to-income ratio, as it shows you haven’t taken on too much debt.
  • Satisfactory LTV: The LTV, or loan-to-value ratio, measures how much you’re borrowing against how much the home is worth. Lenders typically want to see an LTV of 80% or less; otherwise, they’ll likely require private mortgage insurance (PMI) to protect their investment.

Making sure your qualifications line up with what lenders are looking for can boost your chances of getting the loan you want.

FAQ

How long does it take to get a mortgage?

Because a home is such a big purchase, it can take about a month to complete the process, including the application, underwriting, and closing. While it could take less time than that, it might take longer, too — up to two months in some cases. So it’s important to plan accordingly.

How many years of income do you need to get a mortgage?

Generally, lenders require two years of income to approve a mortgage but it’s possible to get one with less than two years with a nontraditional mortgage. 

Can you get a mortgage with bad credit?

Yes, you may be able to get a mortgage even with fair or poor credit (credit scores of 669 or below). For instance, home loans backed by the FHA are available for borrowers with scores as low as 500, if you have a large down payment.