Getting a Mortgage to Buy a Home

Quick answer

• Understand your credit score and financial health.
• Get pre-approved for a mortgage to know your budget.
• Shop around for the best mortgage lender and loan terms.
• Gather necessary documentation, including income and asset proof.
• Compare loan estimates carefully to understand all costs.
• Work closely with your loan officer and real estate agent.

What to check first (before you choose a payoff plan)

Your Credit Score and History

Before you even start looking at homes, understand your credit report. A higher credit score generally leads to better interest rates and loan terms. Check your report for errors and address any issues that could negatively impact your score. Lenders will scrutinize this history to assess your reliability as a borrower.

Your Financial Health and Budget

Assess your income, savings, and existing debts. Lenders will look at your debt-to-income ratio (DTI), which compares your monthly debt payments to your gross monthly income. Having a clear picture of your finances helps you understand how much you can realistically afford for a monthly mortgage payment, including principal, interest, taxes, and insurance.

Down Payment and Closing Costs

Determine how much you can put down as a down payment. While 20% down can help you avoid private mortgage insurance (PMI), many loan programs allow for much lower down payments. Also, factor in closing costs, which can add several percentage points to the loan amount and typically include appraisal fees, title insurance, origination fees, and more.

Current Market Conditions

Research current mortgage interest rates and housing market trends in your desired area. Rates can fluctuate daily, impacting your monthly payment significantly. Understanding the local market helps you gauge affordability and potential for home value appreciation.

Mortgage Loan Application: Step-by-Step

1. Check Your Credit Score and Report:

• What to do: Obtain copies of your credit reports from the three major bureaus (Equifax, Experian, TransUnion) and review them for accuracy. Get your credit score.
• What “good” looks like: A credit score of 740 or higher generally qualifies you for the best rates. Ensure all information is accurate.
• Common mistake: Not checking credit reports until late in the process.
• How to avoid it: Start this process months before you plan to buy a home.

2. Assess Your Financial Readiness:

• What to do: Calculate your debt-to-income ratio (DTI) and estimate how much you can comfortably afford for a monthly mortgage payment.
• What “good” looks like: A DTI below 43% is often preferred by lenders, though lower is better. You have a clear understanding of your monthly housing budget.
• Common mistake: Overestimating how much house you can afford.
• How to avoid it: Be conservative with your budget and include all potential housing costs (PITI: Principal, Interest, Taxes, Insurance).

3. Save for Down Payment and Closing Costs:

• What to do: Determine your target down payment amount and gather funds for closing costs.
• What “good” looks like: You have saved a significant portion for your down payment and have a separate fund for closing costs.
• Common mistake: Underestimating closing costs.
• How to avoid it: Research typical closing costs in your area and add a buffer.

4. Get Pre-Qualified or Pre-Approved:

• What to do: Contact lenders to get pre-qualified (an estimate) or pre-approved (a more thorough review) for a mortgage.
• What “good” looks like: You have a pre-approval letter stating the maximum loan amount you qualify for.
• Common mistake: Only getting pre-qualified, which isn’t as strong as pre-approval.
• How to avoid it: Aim for pre-approval, which involves a lender verifying your financial information.

5. Shop for Lenders and Loan Programs:

• What to do: Compare offers from multiple lenders (banks, credit unions, mortgage brokers) for interest rates, fees, and loan types.
• What “good” looks like: You have received and compared Loan Estimates from at least 3-4 lenders.
• Common mistake: Sticking with the first lender you speak with.
• How to avoid it: Treat mortgage shopping like any other major purchase; compare extensively.

6. Choose Your Mortgage Lender and Loan Type:

• What to do: Select the lender and loan program that best fits your financial situation and goals.
• What “good” looks like: You’ve chosen a reputable lender with competitive terms and a loan type (e.g., fixed-rate, adjustable-rate) that suits your needs.
• Common mistake: Focusing solely on the lowest advertised interest rate without considering fees.
• How to avoid it: Look at the Annual Percentage Rate (APR) and the total cost of the loan.

7. Submit Your Formal Mortgage Application:

• What to do: Complete the formal mortgage application with your chosen lender.
• What “good” looks like: You provide all requested documentation accurately and promptly.
• Common mistake: Delaying the submission of required documents.
• How to avoid it: Have your documents organized and ready to go.

8. Underwriting Process:

• What to do: The lender’s underwriter reviews all your documentation and verifies your financial information.
• What “good” looks like: The underwriter approves your loan with minimal or no conditions.
• Common mistake: Not responding quickly to underwriter requests.
• How to avoid it: Be prepared for follow-up questions and provide any additional information needed promptly.

9. Appraisal and Home Inspection:

• What to do: The lender orders an appraisal to determine the home’s market value. You should also arrange for a professional home inspection.
• What “good” looks like: The appraisal meets or exceeds the loan amount, and the inspection reveals no major issues.
• Common mistake: Skipping the home inspection.
• How to avoid it: A home inspection is crucial for identifying potential costly repairs.

10. Loan Approval and Closing Disclosure:

• What to do: Once approved, you’ll receive a Closing Disclosure detailing all final loan terms and costs.
• What “good” looks like: You understand all the figures on the Closing Disclosure and have no last-minute surprises.
• Common mistake: Not carefully reviewing the Closing Disclosure.
• How to avoid it: Compare it to your Loan Estimate and ask questions about any discrepancies.

11. Final Walk-Through and Closing:

• What to do: Conduct a final walk-through of the property to ensure it’s in the agreed-upon condition. Attend the closing to sign all final documents and pay your closing costs.
• What “good” looks like: The home is in good condition, and you successfully close on your mortgage.
• Common mistake: Forgetting to do a final walk-through.
• How to avoid it: This is your last chance to catch any issues before ownership transfers.

Mortgage Loan Options and Trade-offs

• Fixed-Rate Mortgage: The interest rate remains the same for the life of the loan.
• When it fits: Ideal for borrowers who prefer payment stability and plan to stay in their home long-term, especially in a rising interest rate environment.
• Adjustable-Rate Mortgage (ARM): The interest rate is fixed for an initial period, then adjusts periodically based on market conditions.
• When it fits: Good for borrowers who plan to sell or refinance before the fixed period ends, or who expect interest rates to fall. Can offer lower initial payments.
• FHA Loan: Government-insured loans with lower down payment requirements and more flexible credit score criteria.
• When it fits: Beneficial for first-time homebuyers or those with less-than-perfect credit or limited savings for a down payment.
• VA Loan: Guaranteed by the Department of Veterans Affairs, these loans offer no down payment and no private mortgage insurance for eligible veterans and service members.
• When it fits: An excellent option for those who have served in the U.S. military and meet the eligibility requirements.
• USDA Loan: For rural and suburban homebuyers, these loans often feature no down payment requirements.
• When it fits: Suitable for moderate- to low-income borrowers purchasing homes in eligible rural or suburban areas.
• Conventional Loans: Mortgages not backed by a government agency. They typically require higher credit scores and larger down payments than government-backed loans.
• When it fits: For borrowers with strong credit profiles and sufficient savings for a down payment, often leading to better interest rates.
• Jumbo Loans: Mortgages that exceed the conforming loan limits set by Fannie Mae and Freddie Mac.
• When it fits: For borrowers purchasing high-value homes where the loan amount surpasses standard limits.
• Mortgage Points: Fees paid directly to the lender at closing in exchange for a reduced interest rate.
• When it fits: Can be beneficial if you plan to stay in the home long enough for the savings from the lower rate to outweigh the upfront cost.

Common Mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
Not checking credit reports/scores	Higher interest rates, loan denial, unexpected fees.	Obtain and review credit reports early; dispute errors; improve score if needed.
Not getting pre-approved	Wasting time on homes outside your budget; losing out to cash offers.	Get pre-approved by a lender to know your borrowing power and strengthen your offer.
Only shopping one lender	Missing out on better rates and terms, costing thousands over the loan life.	Compare Loan Estimates from at least 3-4 lenders to ensure competitive pricing.
Underestimating closing costs	Shortfall of funds at closing, delaying or jeopardizing the purchase.	Research typical closing costs in your area and budget for 2-5% of the loan amount, plus a buffer.
Making large purchases or opening new credit	Lowering your credit score or increasing your debt-to-income ratio.	Avoid significant financial changes between pre-approval and closing.
Not understanding loan types	Choosing a loan that doesn’t fit your financial situation or goals.	Research fixed vs. adjustable rates, government-backed options, and their pros and cons.
Skipping the home inspection	Discovering costly, hidden problems after closing that are your responsibility.	Always hire a qualified inspector to identify potential issues before finalizing the purchase.
Not carefully reviewing the Closing Disclosure	Missing errors or unexpected fees, leading to financial surprises.	Compare it to your Loan Estimate; ask your loan officer to explain every line item.
Ignoring property taxes and homeowner’s insurance	Underestimating your total monthly housing expense (PITI).	Factor these essential costs into your budget from the start.
Not having an emergency fund	Inability to cover unexpected home repairs or job loss, risking foreclosure.	Maintain a separate emergency fund for at least 3-6 months of living expenses.

Decision Rules (simple if/then)

• If your credit score is above 740, then focus on comparing interest rates and fees across lenders because you likely qualify for the best terms.
• If your credit score is between 620-740, then explore both conventional and government-backed loans (like FHA) because you might find better options with slightly more flexible requirements.
• If you have limited savings for a down payment, then investigate FHA, VA, or USDA loans because these programs often require little to no down payment.
• If you plan to move within 5-7 years, then consider an Adjustable-Rate Mortgage (ARM) with a favorable introductory period because the initial lower rate could save you money.
• If you prioritize payment predictability and plan to stay in your home for a long time, then choose a Fixed-Rate Mortgage because your principal and interest payment will remain constant.
• If you are a veteran or active-duty military member, then explore VA loans because they offer significant benefits like no down payment and no PMI.
• If you find unexpected major issues during the home inspection, then you can negotiate with the seller for repairs or a price reduction, or you can choose to walk away from the deal because you are typically not obligated to buy if contingencies are not met.
• If your debt-to-income ratio is above 43%, then work on reducing your debt or increasing your income before applying for a mortgage because lenders often have strict DTI limits.
• If you are purchasing a home in a rural or suburban area and meet income requirements, then look into USDA loans because they can offer 100% financing.
• If you are buying a high-value home that exceeds conforming loan limits, then you will need to seek out Jumbo Loans because standard loan programs will not apply.
• If you find a significant discrepancy between your Loan Estimate and Closing Disclosure, then ask your loan officer for a clear explanation immediately because it could be an error or an unexpected fee.

FAQ

Q: How much of a down payment do I need?

A: While 20% down can help you avoid Private Mortgage Insurance (PMI) on conventional loans, many programs allow for down payments as low as 3% or even 0% for eligible borrowers (like VA and USDA loans).

Q: What is Private Mortgage Insurance (PMI)?

A: PMI is an insurance policy you pay if your down payment on a conventional loan is less than 20%. It protects the lender if you default. You can typically remove it once you reach 20% equity.

Q: How long does it take to get a mortgage?

A: The mortgage process, from application to closing, typically takes between 30 to 60 days. This can vary depending on the lender, your responsiveness, and market conditions.

Q: What are closing costs?

A: Closing costs are fees paid at the end of a real estate transaction. They can include appraisal fees, title insurance, origination fees, recording fees, and more, often totaling 2% to 5% of the loan amount.

Q: Can I use gift money for my down payment?

A: Many lenders allow you to use gift money for your down payment, but it usually must be properly documented. The donor will typically need to sign a gift letter stating the money is a gift and not a loan.

Q: What’s the difference between pre-qualification and pre-approval?

A: Pre-qualification is a preliminary estimate of how much you might be able to borrow based on self-reported information. Pre-approval involves a lender verifying your financial information, making it a stronger indicator of your borrowing power.

Q: What is an escrow account?

A: An escrow account is a trust account managed by your lender to hold funds for your property taxes and homeowner’s insurance premiums. These are typically paid monthly and collected with your mortgage payment.

What this page does NOT cover (and where to go next)

• Specific details about state or local housing assistance programs.
• Advanced tax implications of homeownership.
• Strategies for negotiating home prices or seller concessions.
• Homeowners insurance policy comparisons.
• The process of selling your current home to buy a new one.