Most people can't buy a home outright. Rather, they need to finance it with a mortgage. If you're ready to apply for a mortgage, here's how to go about it.
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9 steps to apply for a mortgage
Applying for a home loan may seem like a daunting task, but once you know what to expect, you may have a much easier time going about it. Here are the steps you'll take in the course of your mortgage application.
1. Make sure you're a good home loan candidate
Mortgage lenders look at certain factors when deciding whether to approve a home loan or not. Before you apply for a mortgage, make sure you can check off the following items:
- Have a credit score of at least 620 (That's the minimum score mortgage lenders require for a conventional loan. You may be able to apply for a different type of mortgage, like an FHA loan, that allows for a lower credit score.)
- Have a debt-to-income ratio of 36% or lower (Make sure your monthly debt payments don't exceed 36% of your gross income, which is your income before taxes and deductions)
- Have a steady job
- Have money for a down payment (ideally 20% of the home cost so you don't get hit with private mortgage insurance, but many lenders will accept less)
If you're applying for a mortgage for the first time, you can also check out this beginner's guide to home loans, which explains the ins and outs of mortgages.
2. Figure out how much of a loan you can afford
To apply for a mortgage, you'll need to decide how much you're able to borrow. Generally speaking, your housing costs should not exceed 28% of your gross income, and applying to borrow more than that will hurt your chances of getting approved. Remember, there's a danger to lenders in giving out money that won't get repaid -- so you'll want to apply for an amount you can afford.
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3. Figure out what loan term is right for you
When you borrow money to buy a home, you can generally choose to pay it back over 30, 20, or 15 years. Some lenders also offer other mortgage repayment terms (for example, you might get a 10-year mortgage).
If you can afford a higher monthly payment, it could pay to get a loan with a shorter term because that will usually result in a lower interest rate on your mortgage. You can also see if an adjustable-rate mortgage makes sense based on rates and your plans to stay in your home. With an adjustable-rate mortgage, you're only guaranteed your initial interest rate for a preset period of time, after which it can rise or fall -- so there's risk involved in going this route.
4. Gather your paperwork
When you apply for a mortgage, you'll need to provide your lender with specific information about your income and assets. Before you apply, gather the following documents:
- Your most recent tax return
- Two months' worth of pay stubs
- Two months of bank statements
- A letter from your employer confirming that you're an employee in good standing
These are all items your lender will likely need to determine whether you're approved for a mortgage.
5. Apply with different lenders
Different mortgage lenders set their own rates based on the factors mentioned above -- credit score, debt-to-income ratio, earnings, and funds available for a down payment. That's why it's a good idea to fill out more than one mortgage application. The more offers you get, the easier it'll be to compare your choices and come away with the best deal on a home loan.
That said, it's a good idea to shop around for a mortgage loan within the same 14-day period. Whenever a lender pulls your credit report, it counts as a hard inquiry on your record. Too many hard inquiries could hurt your credit score, but if you apply for multiple mortgages within 14 days, all of those applications will count as a single inquiry.
6. Select the right offer
Once you've filled out those mortgage applications and hear back from lenders, you'll need to decide which lender to work with. When comparing your choices, don't just automatically go with the lender that offers the lowest interest rate. Pay attention to closing costs, too. Closing costs are the fees you'll pay to finalize a home loan, and they can vary by lender. It could be that one lender offers a lower interest rate on your mortgage but much higher closing costs than another.
7. Stay in touch with your lender and respond when needed
Once you decide to accept an offer for a mortgage, it could take weeks for that loan to close. That's because your lender will need to process your application and verify your financial information via a process known as underwriting. Be sure to stay in contact with your lender to make sure things are moving along, and be prepared to provide additional documentation as needed. If you're self employed, for example, you may need to take extra steps to provide proof of income. See our guide to self-employed mortgages for more information on this topic.
8. Secure homeowners insurance
Mortgage lenders generally require proof of homeowners insurance to close on your loan. Just as it's important to shop around for a home loan, it's also a good idea to shop around for insurance to see what premium rates you qualify for.
9. Prepare for your closing
Once your lender is ready to finalize your loan, you'll be given a closing packet full of loan documents. Be sure to review that information carefully, as it will spell out the terms of your loan and outline the payments and costs you'll be responsible for. You'll also need to decide if you're rolling your closing costs into your mortgage or paying them up front. Usually, you'll get the option to pay those costs off over time rather than having to bring extra money to your closing. Once that's all set, you're ready to close. You'll sign a hefty stack of paperwork and your mortgage will be in place.
Getting a mortgage can be a daunting prospect, but it doesn't have to be. The key is to know what to anticipate and be patient, since the process can be time consuming. If you're applying for your first mortgage, check out this list of the best mortgage lenders for first-time home buyers. Working with the right lenders could make the process go more smoothly.
RELATED: Check out The Ascent's TD Bank Morgage review.
Still have questions?
Here are some other questions we've answered:
- How Does Your Credit Score Affect Your Mortgage Rates?
- How to Get a Mortgage
- How to Get Pre-Approved for a Mortgage
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If you're a first-time home buyer, our experts have combed through the top lenders to find the ones that work best for those who are buying their first home. Some of these lenders we've even used ourselves!
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FAQs
To apply for a mortgage, make sure you have a decent credit score, a reasonable amount of debt relative to your income, a steady job, and funds available for a down payment. Then, gather your financial documents, fill out a number of applications, and compare your offers once different lenders respond.
To apply for a mortgage, you'll generally need to provide proof of income that includes your most recent tax return and several months of pay stubs. You'll also need to provide recent bank statements and a letter verifying your employment status. If you're self employed, your lender may require additional documentation.
