How to apply for a mortgage loan in 9 steps

If you’re buying a home, that most likely means applying for a mortgage. According to the National Association of Realtors, about 80% of buyers finance their home purchase with a loan.

Applying for a mortgage is not nearly as exciting as looking at houses, but it’s a crucial step toward homeownership. Our step-by-step guide walks you through how to apply for a mortgage so you can get to the fun part of your homebuying journey.

1. Pre-application steps

The process to get a mortgage should begin well before you start touring houses or talking to mortgage lenders. Working on your financial health and saving for a down payment can take months (or longer), but taking these early steps can save you substantial money on interest down the line. These steps will also streamline the mortgage process:

• Check your credit scores
• Improve your financial profile
• Save for a down payment
• Determine your budget
• Research loan types
• Get your documents in order

If you’re ready to choose a lender and submit a mortgage application, skip ahead to step 2.

Check your credit scores

Your credit scores play a significant role in your eligibility and the mortgage rate you’ll receive. To qualify for a conventional mortgage, most lenders require credit scores of 620 or higher. You may be able to get an FHA loan with scores as low as 500. But generally, the higher your scores, the better. Here’s a look at how your credit scores impact your mortgage rate on a 30-year fixed-rate mortgage for $300,000, according to FICO:

Your bank or credit card company may provide free access to your credit scores, or you can pay for them at myFICO.com or via other third-party services. If your credit scores have room for improvement, you can increase your scores by making on-time debt payments, keeping credit card balances low and avoiding new loans or credit cards.

Related >> What factors affect your credit scores?

Improve your financial profile

Yes, your credit scores are important, but they’re only one piece of the puzzle. Lenders will also pull your credit reports to understand how responsibly you’ve repaid debt in the past and how much debt you currently have. If your credit reports contain a history of missed payments or maxed-out credit cards, you may struggle to qualify for a mortgage.

Order your free credit reports from all three consumer credit bureaus (Experian, Equifax and TransUnion) at AnnualCreditReport.com. If you find inaccurate information in your reports, file a dispute with the reporting credit bureau.

Another good way to improve your financial health is to keep your debt-to-income (DTI) ratio low by paying down debt and maintaining or increasing your income. Your DTI is the total of your monthly debt payments divided by your pre-tax income. Some lenders look for a DTI ratio of 36% or below (including the mortgage payment), while others will accept 43%. Some loan options allow higher ratios if other factors offset it, such as a high down payment.

Determine your budget

Just because you may be approved for a high-dollar home loan doesn’t mean you can afford it.

Figure out what you can afford — in both monthly payment and home price — by using a home affordability calculator to crunch the numbers. A budget can help.

Save for a down payment

Many lenders offer conventional loans with down payments as low as 3%, and some programs (like VA loans) don’t have a down payment requirement. However, a larger down payment will decrease your monthly dues, help you land a more competitive interest rate and increase your buying power.

If you plan to put less than 20% down on a conventional loan, you’ll have to buy private mortgage insurance (PMI), adding to your monthly costs — but you may decide that it’s a worthwhile trade-off if a 20% down payment is out of reach.

Keep in mind that you’ll also need to set aside funds for closing costs, which can run between 2% and 6% of the loan amount.

Example: Let’s say you want to borrow a 30-year conventional mortgage for $400,000 at 6.87% APR. You could save more than $200,000 in repayment if you can put 20% down over a 3% down payment.

In the table below, we’ve used the same APR for each scenario; however, in reality, increasing the down payment will likely lower the loan’s rate and save you even more in the long run.

Tip: Use a mortgage payment calculator to estimate how your down payment can impact your loan.

Research loan types

When shopping for a home loan, you’ll need to consider the type of mortgage that best fits your needs. From various loan programs to interest rate structures and loan terms, the costs and features of home loans can vary widely. Let’s examine your options for each.

Mortgage type

The most common type of home loan is a fixed-rate conventional mortgage. But government-backed loans (FHA, VA and USDA loans) can be great options for certain buyers.

Interest rate structure

Mortgages can have a fixed or variable interest rate.

Fixed-rate loans are more popular because they offer predictability and simplify budgeting — the rate won’t change throughout the life of the loan. When mortgage rates are low, you can lock in an affordable rate and have peace of mind that your costs won’t go up. However, if rates fall, you’ll have to go through the hassle and cost of refinancing to snag a better rate.

Adjustable-rate mortgages (ARMs) feature a lower fixed rate for an initial period, after which the rate can rise or fall with the market at preset intervals. For example, a 3/6 ARM would feature a relatively lower fixed rate for the first three years. Then, beginning in year four, the rate would adjust every six months. This means your mortgage dues will be unpredictable — if rates fall, you’ll reap the benefits of a lower payment without needing to refinance. But if rates climb, you’ll be on the hook for higher monthly dues.

Loan term

Your mortgage term is how long you have to repay the loan. The most common loan terms are 30 and 15 years, but some lenders may offer shorter or custom loan terms.

A 30-year term results in lower monthly payments (because the loan amount is spread across more years), but you’ll pay more in interest because it has more time to accrue. Shorter-term mortgages have higher monthly payments but lower total loan costs.

Interest rates on 15-year mortgages are also lower than 30-year rates. If you can afford the higher monthly dues, a 15-year loan can save you money over time.

Get your documents in order

Most lenders request personal and financial information when you first contact them and require documents during loan processing. To streamline the loan shopping process, gather the following information into a loan application packet:

• Pay stubs for the past 30 days
• Proof of any additional income
• Federal tax returns, W-2s and 1099s for the past two years
• Bank and investment account statements for the past two months
• Documentation of your down payment
• Salary and employment information
• Details of any outstanding debts
• Social Security numbers and photo IDs for all borrowers

2. Compare lenders and get preapproved

After laying the groundwork for a successful mortgage application, you’re ready to shop for the best mortgage lenders. It’s good practice to get a quote from your current bank or credit union, but also consider national banks, smaller regional or community banks, credit unions, independent mortgage lenders and online-only lenders. Different types of lenders offer different features.

After finding several lenders that may be a good fit, get preapproved with at least three. Preapproval doesn’t guarantee loan approval, but it indicates a lender will likely lend to you based on the information you provided. Your preapproval shows sellers and real estate agents that you’re a serious buyer, and it estimates the loan amount and interest rate you’ll qualify for.

Keep in mind that preapprovals usually expire after 30 to 90 days, so get preapproved right before you’re ready to visit properties and perhaps make an offer. If it expires, you’ll need to go through the preapproval process again.

3. Go house hunting

Now it’s time for the fun part: finding your dream home. Technically, you can house hunt at any point, but if you start house shopping without a preapproval letter and want to make an offer on a home, you’ll be at a disadvantage compared to preapproved buyers.

Keep your budget in mind as you shop, and don’t forget about your mortgage type. If you’re getting an FHA loan, for example, the home may need to meet certain safety criteria. Your real estate agent can guide you toward homes that fit your budget and loan specifications.

4. Complete your mortgage application

Once you’ve found a home and your offer has been accepted — also known as being “under contract” — you’ll finalize your official mortgage application. Here, you must supply the verification documents from your loan application packet.

Submitting a formal application to at least three lenders will help you better compare loan options now that you know the home you want to buy.

“​​This is the largest financial purchase of your life,” said National Association of Mortgage Brokers president Valerie Saunders. “Don’t be afraid to speak with more than one company in order to find the best [one] that fits you.”

How to apply for a mortgage loan with multiple lenders

Each lender will provide a Loan Estimate within three business days of receiving your loan application. This document details the mortgage offer, including loan type, interest rate, loan amount, monthly dues, fees and closing costs.

With several Loan Estimates in hand, you can make an apples-to-apples comparison to find which loan is best for you. (Compare APRs, not simple interest rates, for a more accurate picture of total cost.) Some homebuyers may not realize that mortgage terms are negotiable — you can ask one lender to match the rate, fees or other details of another loan offer.

“A good lender will make sure that any borrower they work for has a home they love with a mortgage they can afford,” said Community Home Lenders Association president Taylor Stork.

Once you’re satisfied with the terms, select your lender and tell them you want to proceed.

5. Schedule a home inspection

After moving forward with a lender, the loan enters the underwriting process. At this stage, your lender will verify your personal and financial information, and you’ll have a few action items to complete.

One of those steps is getting a home inspection from an independent inspector of your choice. (Your real estate agent or mortgage broker may have vendor suggestions, but you’re free to choose any inspector.) The home inspector thoroughly reviews the home’s condition, inside and out. This is a crucial point in the process, as the inspection will reveal any issues with the property. Inspection costs vary by location and size of the property, but generally range from $200 to $500.

If your inspection reveals necessary, major repairs, you can negotiate the sales price or request a seller’s credit. Depending on the extent of the issues and your contract terms, you may be able to cancel your offer (but you could potentially lose your “earnest” money).

Good to know: Not all loan types require an inspection, but it’s highly recommended that all homebuyers get one. You’ll want to know about any major problems with the property before closing.

6. Wait for the home appraisal

A home appraisal is a professional estimation of the home’s value. Lenders order an appraisal when the loan goes into processing to ensure the mortgage is below the home’s value. The appraiser will visit the home and compare it to similar homes in the area that have recently sold.

It’s possible for the home to appraise below the purchase price. In this case, the lender won’t approve your loan as-is, but you have options; you can increase your down payment to decrease your purchase price or ask the seller to reduce the home price. Depending on the specifics of your situation, you may also be able to cancel the contract or appeal the appraisal.

In many cases, the home appraisal is the final hurdle to clear before your loan is ready to close.

7. Get homeowners insurance

While your lender continues to process the mortgage, work on securing homeowners insurance. Like choosing a lender, it pays to shop around and get quotes from several insurance providers.

Your lender may have stipulations for your insurance, so adhere to any guidelines they provide and get any additional coverage your property requires, such as flood insurance.

8. Wait for underwriting to be completed

The full mortgage underwriting process, from application to closing, can take between 30 and 60 days, although some loans have faster or longer timelines.

This part of buying a home can feel stressful as you wait to hear from the underwriter. During this time, avoid making any decisions that can affect your application — don’t open new credit cards or make large withdrawals, pay all bills on time and avoid changing jobs, if possible.

Your lender may need additional information from you during this stage. Be responsive to their requests and complete action items right away to help ensure an on-time closing.

9. Close on the mortgage

Once your lender has completed the underwriting process, they’ll let you know your loan is “cleared to close.” Your lender will arrange a closing date with the title company or attorney.

Three business days before closing, your lender will send you a Closing Disclosure, which spells out the final details of your mortgage. Review this document closely to ensure the terms are correct. You’ll also prepare your closing funds via a cashier’s check or wire transfer — the Closing Disclosure will spell out exactly how much cash you need to close, including your down payment and closing costs.

Before closing, you’ll perform a final walkthrough of the home to ensure it’s in the expected condition.

At closing, expect to sign and receive a lot of paperwork. You may receive most of your documents electronically if you’re using an online lender. After all parties have signed the paperwork and you’ve handed over your deposit and closing fees, you’ll get the keys to your new home!

Frequently asked questions (FAQs)

How long does the entire mortgage process take?

The mortgage process typically takes between 30 and 60 days from application to closing. Note that your timeline could be shorter or longer depending on your loan type, lender and transaction details.

Can I get a mortgage with bad credit?

Yes, you can get a mortgage with bad credit. FHA loans have a minimum credit score requirement of 500 with a 10% down payment, or 580 with a 3.5% down payment. Other loan programs, such as VA and USDA loans, have lenient requirements that allow room for borrowers with less-than-perfect credit. But taking the time to improve your credit can pay dividends in the form of lower interest rates and more favorable loan terms.

Can I get a mortgage without a down payment?

Yes, you can get a mortgage without a down payment. Both VA and USDA loans have no down payment requirement, allowing you to finance 100% of the purchase. Additionally, you may qualify for first-time homebuyer grants that help borrowers purchase a home with no money down. Remember that you’ll likely have to pay PMI for a conventional loan if your down payment is less than 20% of the purchase price.

Can I get a mortgage if I’m self-employed?

Yes, you can get a mortgage if you’re self-employed, but the process can be a little more complicated. Lenders typically request proof of at least two years of steady self-employment income and copies of 1099 forms.

Can I get a mortgage if I have a low income?

Loan programs like Freddie Mac’s Home Possible, Fannie Mae’s HomeReady and USDA loans are designed for low- and moderate-income borrowers. Regardless of your income, lenders will look at your debt-to-income ratio to determine your ability to afford a mortgage.

How much are mortgage closing costs?

Mortgage closing costs can run between 2% and 6% of the loan amount. For a $400,000 home loan, expect to pay between $8,000 and $24,000 in settlement fees.