Your step-by-step guide to the mortgage process
The mortgage loan process can seem daunting, especially if you’re a first-time home buyer.
But you don’t have to go it alone. Your real estate agent and mortgage loan officer will be your guides.
It also helps to know what’s coming at each stage of the process so you can be prepared to ask the right questions and make the best decisions. Here’s what to expect.
In this article (Skip to...)
- House Hunting
- Choosing a lender
- Mortgage application
- Home inspection
- Home appraisal
- Closing day
- Mortgage FAQ
1. Budgeting: How much home can you afford?
It’s important to take certain steps before kicking off the mortgage loan process. Most importantly, you should estimate how much house you can afford. This lets you set realistic expectations for house hunting and choosing a mortgage loan.
Instead of trying to define your maximum home purchase price, it may be better to determine the monthly payment you can reasonably afford.
Then, you can work backward using today’s mortgage interest rates to determine your maximum home buying power.
What’s included in your mortgage payment
Current mortgage interest rates are an important part of the equation.
An interest rate change of just 1 percentage point, for example, could raise or lower your purchasing power by tens of thousands of dollars.
Similarly, real estate property taxes affect your payment amount. They may be lower in some neighborhoods or cities in your region. And, association dues for a condo can vary from building to building.
Homeowners insurance premiums may also be part of your monthly payment.
When you focus on a maximum monthly payment instead of a maximum home purchase price, you can be sure you’ve made a budget that accounts for all your ongoing housing costs — not just mortgage principal and interest.
You’ll also need to figure out how much you have in savings. This will inform how much you have for your down payment and closing costs.
2. Get pre-approved for a loan
Once you’ve estimated your own budget, you might start looking at homes within your price range. This is also when you take the first step toward getting a mortgage.
That first step is to get a mortgage pre-approval letter from a lender. This letter shows how much money a mortgage lender would let you borrow based on your savings, credit, and income.
You’ll want to do this before you make an offer on a house.
Most sellers and agents won’t even consider an offer unless the buyer is pre-approved, because the seller needs solid evidence that you’re qualified for a loan to purchase the home.
Sellers want to see a preapproval letter — not a prequalification letter — because a preapproval is better proof of your ability to afford the home.
Note: getting “prequalified” is different from getting a “mortgage preapproval.”
Both terms mean a lender is likely willing to loan you a certain amount of money. But Realtors generally prefer a preapproval letter over a prequalification letter.
That’s because prequalification letters are not verified. They’re just an estimate of your budget based on a few questions. A pre-approval letter, on the other hand, has been vetted against your credit report, bank statements, W2s, and so on. It’s an actual offer from a mortgage company to lend to you — not just an estimate.
You are NOT required to stick with the lender you use for pre-approval when you get your final mortgage. You can always choose a different lender if you find a better deal.
3. Find a home and make an offer
Now that you’ve been pre-approved, it’s time for the fun part: house hunting.
After visiting properties with your agent and picking out the home you want, it’s time to make an offer.
Your real estate agent will know the ins and outs of how to structure the offer. It should include contingencies (or conditions) that must be satisfied before the deal is complete.
When you make your offer, you’ll generally also submit your earnest money deposit.
The earnest money is a cash deposit made to secure your offer on the house and show you’re serious about buying. It can be as little as $500 or as much as 5 percent of the purchase price or higher, depending on local custom.
Speak with your real estate agent ahead of time about how large the earnest money deposit is likely to be, and be ready to write a check or make a wire transfer when you have an offer accepted — especially if you’re buying in a competitive market.
4. Choose a mortgage lender
Now that you’ve found a home and your offer has been accepted, it’s time to make a final decision about your lender.
You can stick with the lender you used during the pre-approval process or you can choose another lender. It’s always a good idea to shop around with at least three different lenders.
When shopping for a mortgage, remember your rate doesn’t depend on your application alone. It also depends on the type of loan you get.
Of the four major loan programs, VA mortgage rates are often the cheapest, typically beating conventional mortgage rates. USDA and FHA loan rates also look low at face value, but remember these loans come with obligatory mortgage insurance that will increase your monthly mortgage payment. Conventional loans also have PMI, but only if you put less than 20% down.
So look at a few different lenders’ rates and fees, but also ask what types of loans you qualify for.
There may be much better deals available than what you see advertised online, especially if you’re a veteran who qualifies for the VA home loan program.
For a detailed explanation of how to compare offers and choose a mortgage lender, see: How to shop for a mortgage and compare rates
5. Complete a full mortgage application
After selecting a lender, the next step is to complete a full mortgage loan application.
Most of this application process was completed during the pre-approval stage. But a few additional documents will now be needed to get a loan file through underwriting.
For example, your lender will need the fully executed Purchase Agreement, as well as proof of your earnest money deposit.
Your lender may also request updated income, liabilities, and asset documentation, such as pay stubs and bank account statements. If you’re self-employed, this process will be more complicated. You may need to show tax returns.
If you receive income from Social Security or a long-term disability policy, you’ll need to share supporting documents with your lender.
This process will help determine your debt-to-income ratio which helps lenders see whether you could afford the new loan’s monthly payments.
You will receive a Loan Estimate within three business days which will list the exact rates, fees, and terms of the home loan you’re being offered.
6. Order a home inspection
As you work through the mortgage process, you may also order a home inspection. Home inspections are usually recommended, though some buyers choose to waive them in a competitive market.
A thorough home inspection gives you important details about the home beyond what you may be able to see on the surface.
Some of the areas a home inspector checks include:
- Home’s structure
Getting a home inspection is important because it helps the buyer know if a home may need costly repairs. If the home needs extensive repairs, you may want to look for another home.
Even if you do want to continue with the purchase, what is uncovered during an inspection can become part of a sales negotiation between buyer and seller, and their real estate agents.
7. Have the home appraised
Your lender will also arrange for an appraiser to provide an independent estimate of the value of the home you’re buying.
Most lenders use a third-party company not directly associated with the lender.
The appraisal lets you know that you’re paying a fair price for the home.
Also, in order for the loan to be approved at the contracted purchase price, the home will need to appraise for the contracted purchase price.
8. Mortgage processing and underwriting
Once your full loan application has been submitted, the mortgage processing stage begins. For you, the buyer, this is mostly a waiting period.
But if you’re curious, here’s what happens behind the scenes:
First, the Loan Processor prepares your file for underwriting.
At this time, all necessary credit reports are ordered, as well as your title search and tax transcripts.
The information on the application, such as bank deposits and payment histories, are verified.
Respond ASAP to any requests during this period to make sure underwriting goes as smoothly and quickly as possible.
Any credit issues, such as late payments, collections, and/or judgments, require a written explanation.
Once the processor has put together a complete package with all verifications and documentation, the file is sent to the underwriter.
During this time, the underwriter will review your information in detail. It’s their job to “nitpick” the information you’ve provided looking for missing items and red flags.
They’ll primarily focus on the three Cs of mortgage underwriting:
- Capacity: Will your income and current debt load allow you to make the loan’s payments each month?
- Credit: Does your credit history show that you pay debts on time?
- Collateral: Is the value of the property you’re buying sufficient collateral for the loan? (In other words: Did the appraisal show the purchase price and home value are aligned?)
During the underwriting process, your loan officer may come back with questions. You should respond as quickly as possible to ensure a smooth underwriting process.
9. Closing day
You’ve made it the big day: closing.
The lender will send your closing documents, along with instructions on how to prepare them, to the closing attorney or title company.
Prepare yourself for a big stack of papers you’ll be signing on the closing date. This is traditionally done in person, though e-closings are becoming more common and may be an option.
One of the more important documents is the Closing Disclosure. It should look similar to the Loan Estimate you received when you originally completed the full loan application.
The Loan Estimate gave you the expected costs. The Closing Disclosure confirms those costs.
In fact, the two should match pretty closely. Laws prevent them from differing too much.
If everything is in order, you’ll sign all your documents, receive your keys, and just like that — you’re a homeowner!
Mortgage loan process FAQ
For most lenders, the mortgage loan process takes about six to eight weeks. But times to close can vary quite a bit from one lender and loan type to the next. Banks and credit unions tend to take a bit longer than mortgage companies. Also, high volume can alter turn times. It may take more than 60 days to close a mortgage during busy months.
Mortgage processing is when your personal financial information is collected and verified. It is the loan processor’s job to organize your loan documents for the underwriter. They’ll ensure all needed documentation is in place before the loan file is sent to underwriting.
Your loan officer will scrutinize your credit report closely, looking at your credit scores, payment history, credit inquiries, credit utilization, and disputed accounts. Lenders want to see a strong borrowing history where you’ve consistently paid back loans on time. Loan officers will also look very closely at your income and asset documentation to make sure you have enough cash flow to make monthly mortgage payments.
Underwriting turn times vary greatly depending on the institution. Many lenders will render an underwriting decision in as little as two or three days. But for some banks and credit unions, underwriting decisions can take a week or even longer.
The actual property inspection conducted by the appraiser can take anywhere from 30 minutes to a few hours. The times vary according to the size and details of the home. The full window — from the time an appraisal is requested by your lender, to when your lender receives the appraisal — is typically five to 10 days.
Typically, your loan officer will call or email you once your loan is approved. Sometimes, your loan processor will pass along the good news.
There are two types of mortgage loan approvals: conditional approval and final approval. After your application is received, either your loan officer or the loan processor will contact you with any additional conditions that are required to get your loan fully approved. Once those conditions have been met, you’ll receive final approval.
Underwriters have to protect the financial health of the lender. If your credit history, income, assets, and liabilities show you’re a higher risk applicant, the underwriter could deny your loan. Be sure you’re sharing up-to-date, accurate, and complete financial documents so your underwriter can get a precise picture of your financial life.
Shorter loan terms cost less over time but require higher monthly payments along the way. Most mortgages have 15- or 30-year loan terms. You can also find 10- or 12-year loan terms. For most borrowers, the best loan term is the shortest one whose monthly payments you can comfortably afford.
A fixed-rate mortgage locks in an interest rate and payment for the life of the loan. An adjustable-rate loan features a fixed rate for a while, but then the interest rate fluctuates with the market each year. Some borrowers choose an adjustable-rate mortgage (ARM) if they plan to sell or refinance the home within the first few years. Otherwise, ARMs can be risky.
A larger down payment opens up more mortgage opportunities for borrowers, but not all new home loans require a large down payment. USDA and VA loans, for example, offer zero-down mortgages. Conventional loans typically require at least 3 percent down, and FHA loans require 3.5 percent down. A low-down-payment loan typically requires mortgage insurance, which increases your monthly payment.
Closing costs include a variety of charges, like loan origination fees, appraisal fees, title fees, and other legal fees. You can expect closing costs to be around 2 percent to 5 percent of your loan amount.
LTV, or loan-to-value ratio, measures the size of your loan compared to the value of the home you’re buying. An LTV of 90 percent means the loan size, or lien, is 90 percent of the home’s value. A 90 percent LTV loan would require a 10 percent down payment.
Credit requirements for homeownership vary between lenders and loan types. Typically, FHA loans require a credit score of at least 580; conventional and VA loans require a score of at least 620; and USDA loans require a credit score of 640 or higher. But lenders often set their own requirements which may be higher or lower.
Mortgage insurance premiums help protect your lender in case you default on the loan. A foreclosure typically costs the lender as well as the borrower. While mortgage insurance may seem annoying and expensive, it also helps you get approved if you can’t afford a 20 percent down payment.
A monthly mortgage payment often includes a home’s annual property taxes and homeowners insurance premiums. These parts of a monthly payment go into an escrow account maintained by your lender. Then, the lender pays these bills from the escrow funds. Lenders and loan servicers provide this service because unpaid property taxes or homeowners insurance premiums could threaten the home’s value.
Start the mortgage loan process
Are you ready to start the mortgage loan process? If so, you can get matched with a lender below to begin your home loan approval.