How to apply for a mortgage

Be ready to submit documents that prove your income and assets. Lenders like borrowers who have a credit score of at least 620, but special programs are available for those with lower scores or have less money for down payments.

How to apply for a mortgage:

1. Calculate how much you can afford. On top of monthly mortgage payments, you’ll likely need money for a down payment and closing costs, on top of other possible expenses like PMI, repairs or HOA fees.
2. Compare lenders. Look at banks, credit unions and online lenders. Loan marketplaces provide an easy way to compare multiple lenders with only one application. Consider its fees, underwriting requirements and interest rates when deciding on a lender.
3. Fill out a loan application. Fill out an application online, over the phone or in person. Lenders ask for details about your finances and credit situation. Expect to submit documentation to verify your information.
4. Your lender reviews your mortgage application. During the underwriting process, your lender investigates your finances.
5. Get your application decision. The underwriter approves or denies your loan application.

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What questions will I need to answer?

The questions you have to answer depends on the loan program you qualify for. Although specific mortgages may have additional requirements, you can expect to answer the following questions:

• Credit score. For conventional loans, most lenders expect a credit score of at least 620, but a 760 or higher can get you better rates. FHA loans allow borrowers a credit score as low as 580. Poor credit scores between 500 and 579 require a higher down payment.
• Proof of income. Lenders want to confirm that you can afford your monthly payments. Show a history of steady income with your last two years of tax returns, W-2 forms and pay stubs.
• Employment history. Lenders prefer borrowers who stay with the same employer. You’ll need to give details about your employment history for the last couple of years.
• Debt-to-income ratio. Most lenders don’t want your debt-to-income (DTI) ratio to be over 43%. Some are more restrictive and want a lower DTI, while others are willing to go up to 50% if you have a high credit score and enough cash flow.
• Loan-to-value ratio. Down payments vary between lenders and loan types. FHA loans offer down payments as low as 3.5% with a loan-to-value (LTV) ratio of 96.5%. Conventional loan accept a down payment as low as 3%, which gives you an LTV ratio of 97%.

3 benefits of preapproval

Although preapproval is not a promise to lend you any money, it can give you a leg up in the home-buying process. Here are three reasons why:

• You’ll know how much you can borrow. A preapproval letter from a lender gives you the green light to finance up to a specific amount. So focus on homes that fall within your price range and budget.
• You’re a more competitive buyer. Sellers like preapproved buyers because a lender has reviewed your finances and is optimistic that you’ll get a loan.
• You’ll get a head start on the application. Since the preapproval process requires you to submit documentation of your income and assets, you’ll already have a lot of the required information ready to go for the loan application. Preapproval can also alert you to any potential problems, so you can address them before you officially apply for a home loan.

Learn more about getting preapproved:

• FHA loan preapproval process
• VA loan preapproval process

The mortgage application timeline

Closing times vary depending on your situation, such as verifiable income and if you’ve found a house. But it generally takes about 45 days to close on a home loan. Here’s the timeline to apply:

1. Fill out an application online, in person or by phone. Lenders must send you a loan estimate within three business days with essential loan information like estimated interest rate, monthly payment amount and closing costs.
2. Provide documentation. Verify your finances by uploading required documents, such as tax returns.
3. Appraisal. Once you sign a purchase agreement, your lender orders an appraisal of the home.
4. Title report. A title report ensures there are no legal issues with the property.
5. Loan decision. After reviewing your application, an underwriter approves or denies your loan.
6. Close on your loan. On closing day, you’ll sign your loan documents and pay your closing costs.

What happens if I’m rejected?

Lenders should provide a reason as to why they rejected your application. If your loan-to-value ratio is too high, consider saving for a higher down payment. If your credit score is the issue, take some time to build it up by paying off credit card balances and lowering your credit utilization. Or, if your debt-to-income ratio is too high, you should consider paying off some debts.
Compare lenders to see if you’d qualify with a different lender with more flexible loan requirements. Since lenders do a hard pull on your credit, try to apply for another lender within 45 days to protect your credit score from dropping too much.

Why does a car loan affect my mortgage application?

Each lender has a set of criteria that borrowers must satisfy to qualify for a home loan. The goal is to minimize the risk to the lender. They want to be as confident as possible that you’ll be able to repay the loan and not default.
To assess your repayment capacity, lenders look at your income and assets relative to your debts and ongoing expenses, known as your debt-to-income ratio (DTI). The higher your DTI, the riskier you are to the lender.
Having a large car loan increases your DTI and reduces the amount of income left over to service a new mortgage.

Can a car loan reduce the amount I can borrow?

A car loan doesn’t necessarily stop you from qualifying for a mortgage. But it could reduce the amount you can borrow, forcing you into a less desirable property bracket.
According to LendingTree, the average car loan amount in the US is $34,635 for new vehicles, with an average monthly payment of $563. Let’s look at an example to see how that payment amount could impact a person’s mortgage borrowing ability.

Bottom line

Lenders ask for a lot of documents and take a careful look at your finances before approving your home loan. Comparing lenders can help you find the best home loan program for your family.

Frequently asked questions

When should you apply for a mortgage?

After you sign a purchase agreement, you’ll need to secure financing and apply for a mortgage as soon as possible. Since the average mortgage process takes about 45 days, you should consider reviewing your finances and gathering your documents before you go house-hunting.

What’s the difference between prequalification and preapproval?

Prequalification is based on information that you provide to a lender about your income and assets. It’ll give you an estimate on what amount you may qualify to borrow.

Preapproval carries more weight because you submit documentation to prove your income and assets. The lender also pulls your credit report and score before issuing your preapproval letter. Sellers and real estate agents prefer to see preapprovals when negotiating a deal.