How to Apply for a Mortgage
Getting a mortgage loan to buy a home is a complex process that typically involves mountains of paperwork. And gathering all those documents might be the easiest step!
There’s a lot to think about, from how a mortgage will impact your financial life now and in the future to exactly what kind of loan is best for you.
If you’re ready to apply for a mortgage, consider using this as your step-by-step guide so you can smartly prepare and successfully get approval for the loan you want.
Determine How Much Home You Can Afford
Before you even approach a lender about a mortgage, do some legwork on your own. You want to get an idea of how much you can actually afford to borrow and repay when you buy your home.
There are a lot of mortgage calculators out there that you can use to help you figure out that number. But don’t rely on these tools alone, because they only take a few factors into account.
Let’s say you can afford a $500,000 mortgage with a $2,360 monthly payment based on your current expenses and income.
But if that’s the top end of what a bank says you can “afford,” think about your future goals and potential life changes.
Do you want to start a family? How will adding a baby to your financial responsibilities impact your monthly cash flow? Will you be able to afford to raise a child if all your extra cash flow goes to fund the largest mortgage you qualify for?
Or maybe you dream of owning your own business someday. Will you have enough money left over each month to save enough to launch the business, and then to get you through tough times if the business struggles?
Don’t forget that your estimated payment may not include property taxes and insurance. And those two numbers can change year to year. If the principal and interest payment on that potential mortgage is already stretching you to your financial limit each month, it may be hard to handle an increase in taxes or insurance.
When determining how much home you can afford, always ask yourself: Will this mortgage payment eat up all of my available cash flow? Will it prevent me from achieving other important goals?
Think from a big-picture perspective. Make sure you determine how much home you can truly afford by thinking about your financial life today — and what it might look like in 5 to 10 years.
Save for a Down Payment
Once you determine how much home you can truly afford, you need to save for your down payment. Ideally, you’ll save 20% of the home’s purchase price (which means you finance 80% of the purchase with a mortgage).
There are a few reasons why making a full 20% down payment benefits you when you apply for a mortgage:
- You will more likely qualify for the mortgage you want, and won’t be limited to a specific type of mortgage like you might be if you had less cash to put down on the purchase.
- You look less risky to a lender when you have more cash upfront. That may allow them to offer you better terms or a lower interest rate.
- You don’t need to pay PMI (private mortgage insurance).
You also have more equity in your home right away. And your monthly mortgage payment will be lower than it would be if you only put down 10% or less.
For some people, it makes sense to partner with a company like Unison that makes an investment in your home by providing up to 50% of the down payment.
Choose the Best Mortgage for You
We say “mortgage” to describe a home loan. But there’s more than one type. Before you apply, think about the best solution for your needs.
Here are four common types of mortgages, and the benefits and drawbacks of each:
|Mortgage Type||Pros:||Cons:||Best For:|
|Conventional Fixed Rate Mortgage||Your principal and interest payment will remain the same over the life of your loan. Your interest rate is fixed and never changes.||Your interest rate is fixed, so you need to refinance if you want to take advantage of better interest rates in the future (if rates fall below your set interest rate).||Borrowers with a 10%-20% down payment and average or higher credit.|
|Adjustable Rate Mortgage (ARM)||You can get a very low interest rate in the first 5 to 10 years on the loan, depending on when the rate starts to adjust.||The interest rate will change each year after your initial term is over (most ARMs have a set interest rate for 5, 7, or 10 years, then the rate adjusts annually). It can spike and significantly raise your payment.||Borrowers who want to take advantage of a low interest rate for the first 5-10 years and may want to sell or refinance during the initial term of the loan, before the interest rate can adjust.|
|FHA Loan||You can put as little as 3.5% down and you don’t need good credit to qualify (although if your credit score is lower than 580 you need to put at least 10% down).||There are a lot of fees involved, including an upfront mortgage insurance premium of 1.75% and an annual mortgage insurance premium of 0.45% to 0.85%.||Borrowers who may not have large amounts of cash available for initial down payments or who have bad credit that want to take advantage of the flexibility of these loans.|
|VA Loan||There is no down payment required on these loans. (In other words, you can get 100% financing on your home.)||There’s an upfront fee of 1.25% to 3.3% of the loan amount, and there’s a limit to how much you can borrow.||VA Loans are only available to borrowers who are active duty military members, veterans, and widowed spouses of service members.|
Talk to a lender or trusted professional (like a financial advisor) if you’re unsure which option makes the most sense for you.
Shop Around for a Lender
Just like you have multiple options when it comes to the specific type of mortgage you can apply for, you have options when it comes to a lender. Consider a few options, get quotes on interest rates, and choose the one you feel most comfortable working with.
You can ask for recommendations from friends and family or your real estate agent. Your agent might also know mortgage brokers that can help you work through the mortgage process.
When you think about recommendations, ask about the person’s experience with the lender. You need to work closely with your loan officer after you apply and get approval for a mortgage.
That can be an intense, stressful process. You want to choose a lender who offers great customer service and remains accessible and responsive to your needs during underwriting.
You can also shop around for the best interest rates. Ask for quotes and compare rates to see who can offer you the lowest — and therefore save you the most money over the lifetime of the loan.
Just be sure to do your rate-shopping all within a 7-day period or so. Each lender generates a hard inquiry on your credit report when they provide a quote. This dings your credit score, which can hurt your chances of getting the best interest rate. But if all the lenders pull your credit within the same window of time, it only counts as one hard inquiry against your score.
Gather Your Documents
You’ve run the numbers. You’ve done the research. You’re ready to apply for a mortgage.
Get ready to gather a lot of paperwork. Lenders need to see a lot of documentation to evaluate your financial situation and make a final decision on whether or not to approve you for the loan.
Here’s what you may need to provide when you apply for a mortgage:
- Proof of income: If you’re employed, this means your W2s from the last two years. And if you’re self-employed or own a business, you need to submit tax returns for the last two years along with any other supporting documentation, like 1099s or P&L statements.
- Tax returns: Some lenders may also want to see your tax returns (if you’re employed and only submitted W2s).
- Proof of employment: You may need to provide paystubs from your employer or other supporting documents, like letters verifying your employment status.
- List of all your liabilities and debts: This includes credit card statements, statements from other loans or lines of credit, and child support or alimony payments.
- List of all your assets: This includes things like retirement accounts, investment accounts, and bank accounts. You can also include proof of other assets that you fully own.
- Explanations for large transactions or unusual situations: Lenders will comb through everything in your financial life when you apply for a mortgage. Be prepared to provide proof or explain any transactions they question (like large cash deposits) or information they deem insufficient (like a gap in work and income history).
If you have these documents available and you completed the steps above, you’re ready! Approach your lender and apply for a mortgage with confidence. Good luck and happy home buying!