How to Get a Mortgage: A Step-By-Step Guide

So you're beginning to embark on your homebuying journey and wondering how to get a mortgage?

Well, you're in the right place as we've broken down the process, step-by-step, from pre-qualification and pre-approval, rates and loans, and more.

This is our step-by-step guide on how to get a mortgage:

Before you make an offer on a home:

Step one: Get prequalified

i. Check your credit reports

  • Use annualcreditreport.com, the only website that’s authorized by federal law to provide free credit reports once per year
  • Check your report for accuracy
  • Recognize that delinquent accounts or too many recent inquiries can harm your credit score and make a lender wary of lending to you 

ii. Check your credit score

Credit reports don’t have your score.

If you have a credit card, your card company may provide your score free online or you can try a site like MyFico.com, Experian.com, or  Equifax.com.

iii. Use an affordability calculator

To get a preliminary estimate of your buying power which you can compare to your final pre-qualified amount; this will also enable you to play around with inputs like your other monthly debt payments (car, credit card, student loan), property taxes, and down payment amount to see how they impact your buying power; for instance, using extra cash to pay down debt could increase your buying power, and you may want to do that before continuing on your homebuying journey; use the US Bank Calculator.

iv. Obtain a pre-qualification

A pre-qualification is not a pre-approval! During a pre-qualification, a lender will provide you an estimate of your maximum loan amount based on your self-provided information. They will not do a credit check, which is helpful at this stage, since it could negatively impact your credit score. However, this is also why it is not taken seriously by homesellers who want certainty about your financial capacity, and why you will need a pre-approval before you submit an offer.

Pre-qualification is typically a <5 minute online application (example) or use your other favorite bank.

Step two: Get pre-approved

1. Ideally you will identify at least 2 lenders to be pre-approved with; at this point, you are either going to work with a mortgage broker, or act as your own mortgage broker shopping amongst different banks and credit unions.

2. Go through the online application and get a pre-approval letter. Learn the difference between a mortgage broker, a mortgage banker, a bank, and a credit union; a mortgage broker or mortgage banker will typically have access to loan products from multiple sources, which could save you the time and effort of having to scour the market yourself.

Step three: Shop for rates

Evaluate type of loan:

1. Conventional vs. Government Insured

If your financial health is lacking, you may need a federal government insured program to qualify for a loan; they are typically more expensive than conventional loans, which are just loans that aren’t government insured.

2. Conforming vs. Non-Conforming (Jumbo)

If you're thinking of purchasing a home that is more expensive than the average home price in your county, then the loan will likely be considered non-conforming, or above the maximum conforming limits set by Fannie Mae and Freddie Mac, the government-sponsored enterprises that support the US mortgage market. Read: Good News on 2021 Loan Limits for more info.

3. Fixed Rate vs. Adjustable Rate; Term

a. Fixed rate means the interest rate doesn’t change during the term of the loan. These are often considered riskier by lenders, and so the interest rate is usually higher than an adjustable rate loan.  Adjustable rate loans usually have a fixed period to start, such as 5, 7, or 10 years, and then they adjust to a new rate based on the market interest rates at that later date. This shifts the risk to the borrower of interest rates potentially being higher in the future.

b. Most mortgages have a term of 30 years, meaning the principal balance is repaid by the end of the 30 years; rather than a balloon payment, where the entire loan balance is paid off at the end of the 30years, typically the principal is amortized over the 30 year period using “mortgage-style amortization”, or the “constant payment method”, which keeps your total monthly payment, including theprincipal and interest components, equal for every period (360 monthly periods for a 30-year loan).  Shorter maturities, such as 15 years, are available in the market; however, because the principal payments are spread over 180 periods rather than 360, your monthly payments will be higher, which typically makes them unattractive for most borrowers.

Compare rates across different lenders for similar loan types, and obtain a pre-approval from that lender for that loan type.

                 

After you win the home:

a. Choose the lender with the best rate and product to move forward with your loan application; this should be a lender you are pre-approved with, since you can’t take chances at this point of being denied while you have the home under contract.

b. In the Bay Area, you are expected to be able to close within 30 days, which is the amount of time your lender has to process your loan application; it is not uncommon for lenders to take up to 45 days when they are backed up, and this needs to be communicated to the seller who may demand extra compensation for going along with the lengthier timeline.  What enables this process to run smoothly in the Bay Area compared to other cities is that sellers typically provide 3rd party inspection reports upfront and very limited due diligence is needed after the purchase agreement is signed.

c. Complete a formal loan application to kick-off the mortgage underwriting process.

Documents as part of the application are likely to include the following:

  •  ID and Social Security number
  • Pay stubs from the last 30 days
  • W-2s or I-9s from the past two years
  • Proof of any other sources of income
  • Federal tax returns
  • Recent bank statements or proof of other assets
  • Details on long-term debts such as car or student loans
  • Signed purchase agreement for the property

d. Wait for underwriting results and respond to additional requests.

  • Appraisal ordered by lender
  • Title search and title insurance
  • Get proof of homeowners insurance
  • Clear to Close or Denied: the underwriting process ends in one of these two ways; the underwriter may need to request additional proof of income, assets, or other forms in additional to the original document list in order to issue an unconditional approval and allow you to schedule a closing date.

READ NEXT: When Is the Best Time To Buy a House?

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