What Do You Need to Get a Mortgage?

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Applying for a mortgage is a critical step in your financial journey, but with so much on the line, it can also be incredibly stressful. 

Not to worry. While the mortgage application process can be scary, not to mention tedious, it’s not all that difficult if you understand the steps you’ll be taking. 

Having all of your documents and personal finances in order before you start the homebuying process is an easy way to make things easier on yourself. 

In this post, you’ll learn about everything you need to get a mortgage, including the necessary paperwork, eligibility requirements, and more.

How To Get a Mortgage: A Step-by-Step Guide

  1. Review your finances and budget
  2. Money for a down payment
  3. A strong credit score
  4. Steady employment history
  5. Funding for closing costs
  6. Mortgage prequalification and preapproval
  7. List your assets
  8. Divorce papers
  9. Gift letters

1. Review your finances and budget

Taking on a mortgage loan means you are responsible for paying back a massive amount of money over a long period of time (typically, 30 years). As such, you need to have a clear understanding of what your monthly cash flow looks like and how much house you can safely afford. 

Mortgage payments, property taxes, homeowners insurance, and utility costs can quickly add up. You also have to put food on the table. And then you have to be aware that as a homeowner, unforeseen expenses can pop up at any minute, whether it’s a flooded basement, a hole in the roof, or a busted furnace. There’s no way of avoiding them, and you need to be prepared to cover it all. 

2. Money for a down payment 

To qualify for a mortgage, serious buyers will also need some money saved up to go toward the down payment for the home purchase. 

This money should be liquid, meaning you can easily access it. For example, a common place to store down payment funds is in a credit union or high-yield savings account (HYSA)

Lenders typically expect a down payment amount of 20%. However, you might be able to put down as little as 3%, though you will find yourself dealing with less attractive terms. The amount you need to put down depends on your situation (e.g., debt-to-income ratio) and on the loan type you are applying for (e.g., conventional loan, jumbo loan, FHA loan, or VA loan). 

But do the math. It might make sense for you to hold off and save up a larger down payment than to rush into an unfavorable situation.

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3. A strong credit score 

Your credit score is based on your credit report and reflects your ability to pay back debt on time. In short, credit scores help financial institutions determine if you are a reliable borrower. 

For example, if you have demonstrated a positive credit history by paying back student loans and credit cards, this will positively affect your score. On the other hand, if you missed payments, or if there are delinquent accounts, this would have a negative impact on your score. The easiest way to check your score is through a credit monitoring service.

Taking out a mortgage is a huge responsibility, and so your credit history is typically one of the most heavily weighted factors when issuing a loan. 

In the years and months leading up to your mortgage application, it’s wise to keep track of your score. This way, if your score isn’t where it should be — ideally, in the good credit range — you have some time to improve your credit

Here’s a typical credit score rating chart: 

  • 300 – 579: Poor 
  • 580 – 669: Fair
  • 570 – 739: Good
  • 740 – 799: Very good
  • 800 – 850: Exceptional

4. Steady employment history 

The ability to demonstrate a steady employment history is also crucial when submitting a loan application. 

Lenders want to see that you are employed and have a history of employment going back several years. Also, lenders need to verify where your money comes from. So you’ll need to produce pay stubs, W-2 forms, and tax returns. All of the information from your income must directly tie back to your Social Security or tax ID number. 

If you are self-employed, banks will want to take a deep look into your business’s finances. 

TIP: If you plan on applying for a mortgage in the near future, you should probably hold off on switching jobs until after you close the deal.

5. Funding for closing costs

In addition to a down payment, borrowers need to come up with extra capital to fund a variety of additional closing costs. Inspections, appraisals, title transfers, title insurance, property taxes, and lawyer fees are just a few of the typical closing cost expenses. Also, if your property is part of a homeowners association, you may be required to pay a first-time assessment as a new buyer.

On average, closing costs tend to range from 2% to 5% of the home’s total purchase price. So, if your dream condo is going to cost $250,000, you can expect closing costs to range from $5,000 to $12,500. 

As you can see, this is no small chunk of change.

6. Mortgage prequalification and preapproval

Now that you have all of your financial ducks in a row, the next step is mortgage prequalification. Generally speaking, it’s a good idea to get mortgage prequalification as soon as you engage with a real estate agent and start shopping for properties. 

Mortgage prequalification is a preliminary assessment from a financial lender that a borrower is eligible for a loan. The lender determines this by doing a soft credit check and by spot-checking some basic facts about a borrower, such as their income, debt, assets, and employment status. These are all standard checks before getting approved for a home loan.

Once you identify the home you want to buy, the next step is making an offer and getting mortgage preapproval, which involves a more rigorous inspection process. In some cases, there is an application fee at this stage, which ranges from $300 to $400. 

7. List your assets 

During the underwriting stage, a mortgage underwriter conducts a thorough audit of all your finances. Expect to provide a list of your assets, including bank statements, brokerage accounts, retirement accounts, and other real estate investments. Don’t forget to list your crypto funds as an asset, if you have any.

8. Divorce papers 

A lender will also want to know about any financial obligations and liabilities that you might have, which could hinder your ability to pay back a loan. 

For example, if you were previously divorced, you will most likely have to submit your divorce papers, which would reveal if you owe alimony or child support. 

9. Gift letters 

It isn’t uncommon for first-time homebuyers to get a little help from their family or friends when making their first home purchase. When this happens, the borrower may be required to provide a gift letter that indicates the money was given free and clear, without any obligation to repay it. 

Benefits of Getting a Mortgage

Now you are familiar with the many steps needed to secure a mortgage, let’s take a look at why you should go through all this hassle in the first place. As it turns out, buying a home and taking on a mortgage can be a very smart move. Here are a few reasons. 

Lock in a low interest rate 

At the time of this writing, mortgage interest rates are at an all-time low. By locking in a low interest rate loan, you can make affordable monthly payments, usually for around the same price you would otherwise pay for rent. In doing so, you get an affordable place to live and, ideally, some free cash to put toward other areas (e.g., savings and investments).

Build equity over time

One of the best parts about being a homeowner is that with each monthly mortgage payment, you’re adding to your own net worth as opposed to your landlord’s. That’s because your mortgage payments directly contribute to your equity in the home. 

Depending on the type of mortgage that you have, after 15 or 30 years of making steady payments, you will most likely own your home outright.

Better quality of life 

An immeasurable benefit to being a homeowner comes with the feeling of owning your own place. Unless you have owned a home before, this might be hard to envision. 

Ask some of your trusted friends that own homes if they are happier being a homeowner compared with when they were renting. They’ll probably mention some down sides — like that busted furnace — but there’s a lot to be said for the feeling that comes with ownership.

Tips For Getting a Mortgage

Here are some important tips to keep in mind when shopping around for the best mortgage. 

Consult multiple lenders

Just because a lender makes an offer doesn’t mean you have to accept it. Instead, take that offer and go visit other financial providers to see if they can beat it. It is common for homebuyers to negotiate with several lenders before taking a loan. 

Learn More:

Be realistic about your real estate goals

Some people go into homeownership thinking they’re going to get rich from the house they buy. It’s possible that your house will increase in value over the years or decades, but you won’t see that money until you sell. You can invest in rental properties, you can buy a house to flip it for a profit, or you can buy a house to live in. Figure out your plan and set your expectations accordingly. 

Avoid private mortgage insurance (PMI)

Whenever possible, try to save up a 20% down payment. If your down payment is less than that amount, you may have to pay private mortgage insurance (PMI), which is a form of insurance that banks require when borrowers are at a higher risk of default.  

Typically, PMI is added to your monthly mortgage payments and costs around 2% of the total sale price. 

Frequently Asked Questions

Do I have to get preapproved for a home loan?

In most cases, yes, you need to get preapproval when applying for a home loan. Preapproval also expedites the mortgage application process. 

Also, once you are preapproved, it’s possible to shop around and find a better loan offer from a mortgage broker. 

How can I find a mortgage lender?

There are a few routes that you can take. Check out the best mortgage lenders for 2021, where you can learn about options for conventional loans, Veterans Affairs loans, Federal Housing Administration loans, and any other type of loan. 

If you’re working with a real estate agent, chances are they can recommend a lender as well.

What is a mortgage calculator?

Mortgage calculators help you determine how much a home loan will cost over time. For example, you can typically include the home price, down payment requirements, mortgage interest rate, and mortgage type. The calculator then calculates your estimated average monthly payment and how many payments will be due. 

Check out The Motley Fool’s free mortgage calculator. Play around with the metrics to see how your monthly payment reacts. The more insight into your finances you get before talking to lenders, the better off you’ll be.

Do I have to show my bank statements when applying for a mortgage?

Yes, most likely. One of the most uncomfortable parts of the mortgage process can be showing your bank statements. However, you shouldn’t have to show individual transactions. Usually, the lender’s main concern is what the statement balance looks like over time. 

The reason that lenders want to view your bank statements is to get an understanding of your cash flow and ability to pay back the loan. Rest assured, they’re not interested in adding up how much you spent last month on Grubhub. 

The Bottom Line

Applying for a mortgage is a necessary step for most people when looking for a new home. The process can seem overwhelming at first — especially for first-time homebuyers — but don’t worry, you’ll get through it. Even if the deal you want falls through, you’ll benefit from learning how the process works and will be more prepared for next time.

It’s also important to remember that you can usually refinance down the line. So, if you don’t get the mortgage rate or loan amount you are hoping for, it’s possible to renegotiate after making some payments. 

With the right approach, the mortgage application process can help you get the home of your dreams. Don’t let the opportunity pass you by because you weren’t prepared. 

Happy house hunting!

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