For the majority of aspiring homeowners, purchasing a property with all cash isn’t a feasible option. In fact, according to recent U.S. Census Bureau data, a significant 61.5% of homeowners currently have a mortgage on their property. Securing a home loan makes homeownership more accessible, but understanding the step-by-step process is crucial for a smooth and successful journey.
This comprehensive guide outlines the 11 essential steps to obtaining a mortgage and purchasing a home.
1. Check Your Credit and Finances
Before anything else, assess your financial standing. Your credit score is a primary factor lenders use to determine your mortgage eligibility and the interest rate you’ll receive.
- Credit Reports and Scores: Obtain copies of your credit reports and scores. Look for any inaccuracies that could be dragging down your score, and dispute them if necessary. A good credit score can lead to more favorable rates and terms. If your score is low, consider taking steps to improve it, such as paying down revolving debt to lower your credit utilization rate (which accounts for 30% of your FICO® Score).
- What Mortgage Lenders Consider:
- Credit Score: Minimum scores vary by lender and loan type. For example, a conventional loan might require a 620+, while government-backed loans may allow lower scores.
- Income and Employment: Lenders need to see stable, predictable income sufficient to cover monthly mortgage payments. Be prepared to provide W-2s, tax returns, and bank statements to verify your income and employment history.
- Debt-to-Income (DTI) Ratio: This ratio compares your total monthly debt payments to your gross monthly income. A lower DTI indicates better debt management. While some lenders may accept a DTI up to 50%, many prefer it below 43% or even 36%.
- Mortgage Reserves: Having accessible assets (cash in savings, retirement, or investment accounts) can strengthen your application, especially if your credit or DTI is borderline. These reserves demonstrate your ability to handle potential financial hardships.
- Loan-to-Value (LTV) Ratio: This ratio compares the loan amount to the home’s value. Lenders generally prefer an LTV of less than 80%, indicating you have significant equity from your down payment.
2. Save for a Down Payment
Your down payment directly impacts your LTV ratio and can influence your approval odds and interest rate.
- 20% Down Payment: A common goal for conventional loans is a 20% down payment, as it allows you to avoid Private Mortgage Insurance (PMI). Once your equity reaches 22%, lenders automatically remove PMI. You can also contact your lender to request removal when your equity reaches 20%.
- Lower Down Payment Options: It’s common to get a mortgage with less than 20% down. Government-backed loans are excellent options:
- FHA loans: As little as 3.5% down.
- USDA and VA loans: Potentially no down payment required for eligible borrowers.
- Saving Strategies: Consider revising your budget, setting monthly savings goals, reducing expenses, picking up a side hustle, or exploring first-time homebuyer programs and grants.
3. Figure Out How Much House You Can Afford
Before you start seriously house hunting, establish a realistic price range.
- Down Payment and Monthly Mortgage Payment: Evaluate your down payment savings and what you can comfortably pay monthly. For example, if you have $80,000 saved for a 20% down payment, you might look at homes up to $400,000. Use a mortgage calculator to estimate monthly payments for different down payment amounts.
- Closing Costs: Be prepared for closing costs, which are fees to qualify and process your loan. These typically range from 2% to 5% of the home’s purchase price and include attorney fees, appraisal fees, and loan origination fees.
- In Houston, Texas, buyer closing costs generally range from 2% to 6% of the home’s purchase price. For a median-priced home, this can be several thousand dollars.
- Debt-to-Income (DTI) Ratio: Calculate your DTI to understand how a new mortgage payment will impact your overall financial health. Lenders typically prefer it below 43%, though some conventional lenders may allow up to 50%.
- Prequalification: Getting prequalified provides an estimate of the loan amount you might qualify for, giving you a clearer picture of your affordability.
4. Find the Right Type of Mortgage Loan
Your down payment amount is a key factor in determining the most suitable mortgage type.
- Conventional Mortgage: Most common; usually requires a minimum credit score of 620, DTI below 50%, and can have down payments as low as 3%. A 20% down payment avoids PMI. Most are “conforming loans” that meet Fannie Mae and Freddie Mac guidelines.
- Jumbo Loan: For high-value home purchases exceeding conventional loan limits. These are “nonconforming” and typically require stronger income and credit.
- FHA Loan: Backed by the FHA, designed for first-time homebuyers with more lenient qualifications (e.g., credit scores as low as 500, down payments as low as 3.5%). However, they often come with mortgage insurance premiums (MIP).
- VA Loan: For eligible service members, veterans, and their families. Often requires no down payment or private mortgage insurance. Lenders may prefer a credit score of 670+, though some accept lower.
- USDA Loan: Available with no money down for lower-income borrowers in qualifying rural areas.
- Fixed-Rate vs. Adjustable-Rate Mortgages (ARMs):
- Fixed-rate: Interest rate and monthly payment remain constant throughout the loan term, offering predictability.
- Adjustable-rate (ARM): Lower initial interest rate for a few years, then adjusts with market conditions. Can be beneficial if you plan to sell before the rate adjusts.
- Loan Term: Common terms are 15- or 30-year mortgages. Shorter terms mean higher monthly payments but less total interest paid. Longer terms mean lower monthly payments but more total interest.
5. Choose a Mortgage Lender
Beyond favorable rates and terms, consider fees and the lender’s reputation.
- Annual Percentage Rate (APR): Compare APRs from several lenders, as it reflects the total cost of borrowing, including interest and fees.
- Fees: Closing costs vary (2% to 5% of loan amount). You may be able to negotiate certain fees, like the origination fee, especially with good credit.
- Reputation: Check reviews, rating sites, and ask for recommendations from friends and real estate professionals.
- Questions to Ask Lenders:
- What types of loans do you offer?
- Which loan best fits my financial situation?
- What are your mortgage qualifications?
- What are the closing costs, and are any negotiable?
- How much house can I qualify for?
- How much will I need for a down payment?
6. Get Your Preapproval Letter
A preapproval letter is a formal document from a lender stating the loan amount you are conditionally approved for, along with estimated interest rates, fees, and closing costs.
- Showcases Buying Power: It demonstrates to sellers that you are a serious and qualified buyer.
- Required Documents: Lenders will verify your claims with:
- Proof of Identity: Government-issued ID, Social Security card.
- Proof of Income: Pay stubs, W-2s/1099s, tax returns. Self-employed individuals may have stricter requirements.
- Proof of Assets: Bank and investment statements, gift letters.
- Current Debts: Credit card, loan, and rent/mortgage statements.
- Comparison: The Consumer Financial Protection Bureau recommends comparing Loan Estimates from at least three lenders.
- Credit Check: Preapproval involves a hard credit check. To minimize impact, complete all preapprovals within a two-week window, as credit scoring models will treat them as a single inquiry.
- Caution: Preapproval is not final approval. Avoid major financial changes (new jobs, new credit) between preapproval and closing, as this could jeopardize your loan.
7. Find a House and Make an Offer
With your preapproval in hand, work with a real estate agent to find a home that meets your budget and needs.
- Making an Offer: Your agent will help you craft an offer. In competitive markets, you might consider offering more than the asking price.
- Earnest Money Deposit: It’s customary to include an earnest money deposit (typically 1% to 3% of the offer price). This deposit is usually returned if the seller rejects your offer. If accepted, it’s often applied towards your down payment at closing.
8. Submit Your Mortgage Application
Once your offer is accepted, submit your complete mortgage application to your chosen lender. Have all supporting documents ready and respond promptly to any further requests from your lender to keep the process on schedule.
9. Wait Out the Underwriting Process
This is where the lender thoroughly vets your application. While some loans can be approved in 15 days, it typically takes one to two months.
- Appraisal: The lender will order a home appraisal to ensure the property’s value aligns with the purchase price.
- Title Search: A title search will be performed to confirm clear ownership and identify any liens or encumbrances on the property.
- Due Diligence: During this time, you’ll perform your own due diligence, including scheduling a home inspection. If unexpected issues or costly repairs are discovered, your contract may allow you to negotiate with the seller or even back out of the deal.
- Homeowner’s Insurance: Secure homeowner’s insurance, as it’s a mandatory condition for loan approval. Your lender will require proof of insurance typically 3 to 15 days before closing.
10. Prepare for Closing
Your loan officer will guide you through the closing process, detailing the fees and documents needed.
- Prepaid Expenses: You’ll likely need to prepay some property taxes and homeowner’s insurance premiums. These funds are often held in an escrow account by your lender to make future payments.
- Closing Costs: Ensure you have funds ready for various closing costs:
- Appraisal Fee: Averages around $357 for a single-family home.
- Origination Fee: Paid to the lender for processing your loan, typically 0.5% to 1.5% of the loan amount.
- Title Search Fee: To ensure a clear title, usually $75 to $200.
- Title Insurance: Lenders require title insurance to protect against title disputes. In Texas, title insurance costs range from 0.6% to 0.9% of the property value. For example, a $300,000 home might have title insurance costs between $1,800 and $2,700. In Houston, sellers traditionally pay the owner’s title insurance, but it’s becoming more common for buyers to pay their own.
- Recording Fees: Charged by the county to record the deed and create a public record. In Harris County (Houston), recording fees for real property documents are $25.00 for the first page and $4.00 for each additional page, plus a transaction fee and service charge.
- Final Credit Check: Lenders often run a final credit check just before closing to confirm no significant changes have occurred.
- Closing Disclosure: Your lender will provide a Closing Disclosure, a final breakdown of loan terms, fees, and closing costs. Review it carefully before signing.
- Funding: On closing day, you’ll conduct a final walkthrough, submit your down payment via cashier’s check or wire transfer, and sign all closing documents. Once complete, the ownership officially transfers.
11. Move Into Your New Home
Receiving the keys is a momentous occasion! Beyond the excitement, remember to:
- Make moving plans.
- Transfer utilities to your name.
- Update your address on all accounts.
While these steps require attention to detail, the satisfaction of homeownership makes it a worthwhile journey. Start by researching current mortgage rates and offers from reputable lenders to begin financing your dream home. Remember to protect your credit throughout the process; services like Experian’s free credit monitoring can help you stay informed of any changes that might affect your mortgage approval.