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The Mortgage Process: 8 Steps to Know
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The mortgage process can be easy or complicated, depending on how financially prepared you are, and your understanding of how mortgages work. Knowing the steps in the mortgage process can save you time, stress and money if you’re buying or refinancing a home.
8 steps in the mortgage process
1. Know what lenders look for
The mortgage process requires a full vetting of all of the financial decisions you’ve made. Your monthly income, monthly debt, credit scores and savings habits will determine whether a mortgage company is willing to lend you hundreds of thousands of dollars to buy a house. Here are the basics of what they look for:
Credit history and scores. Mortgage lenders typically verify your credit scores with three different credit bureaus and pick the middle score. They’ll also check your history for major credit issues like foreclosures, collections or bankruptcies. A 740 credit score or higher usually leads to the lowest interest rates, but some loan programs allow scores as low as 500.
Income and employment history. Stable income and a two-year employment history are the standard benchmarks for a thumbs up on acceptable income. Self-employment, commission income and part-time work will require more documentation to qualify.
Debt-to-income ratio. Your total monthly debt divided by your gross (pretax) income is called your debt-to-income (DTI) ratio. Although lenders prefer a 43% DTI ratio, exceptions are possible up to 50% if you have good credit and extra money in the bank.
Down payment and closing cost funds. Most loan programs require at least a 3% to 3.5% down payment, although eligible military borrowers may be able to get no-down-payment financing with a loan backed by the U.S. Department of Veterans Affairs (VA). You’ll also need to budget 2% to 6% of your loan amount to cover closing costs.
Mortgage reserves. If your credit history is rocky or your DTI ratio is high, lenders may require mortgage reserves, which are cash funds set aside to cover several months’ worth of mortgage payments.
Home value. Mortgages are secured by your home, and most mortgage companies require a home appraisal by a licensed, third-party real estate appraiser to verify your home’s value when you buy or refinance a home. However, with a high down payment, you may be eligible for an appraisal waiver.
2. Organize your financial documents
Although many online lenders can access your credit, income and asset information electronically, they may still require additional documents during the mortgage process. You may also want to have these documents handy when you’re applying for a mortgage to provide the most accurate information.
- A month’s worth of current pay stubs
- Most recent two years’ worth of W-2s or tax returns
- Most recent two months’ worth of bank or asset statements
- Most recent two years’ worth of addresses
- Most recent two years’ worth of employer addresses and contact information
3. Get preapproved
Once you’ve shopped the loan estimates of at least three to five different lenders, it’s time for a mortgage preapproval. You’ll typically fill out a complete online application and provide some of the documents we detailed in the section above. Once the lender reviews all of your information and supporting paperwork and everything checks out, you’ll get a preapproval letter you can use to make offers on a new home.
The mortgage process is the same for a refinance loan loan, only you won’t get a preapproval letter. The lender will approve the refinance, pending verification of your home’s value.
4. Find your home
Once you’re preapproved, it’s time to search for a home. Because your mortgage is tied to the home purchase, the mortgage process can’t be completed until you have an accepted purchase contract. You’ll probably work with a real estate agent and check out several different homes before you find the one you like.
If the housing market is hot, you may need to offer more than the asking price. If there are more available homes than eligible buyers, you may be in a buyer’s market and can potentially offer below asking price, or ask the seller to pay for your closing costs.
5. Lock in your mortgage rate
Your interest rate isn’t guaranteed unless it’s locked in, so once you’ve made an offer that’s accepted, ask your loan officer to lock in the interest rate. A rate lock is a commitment to lend at the rate you were quoted, and typically won’t change unless your credit score drops, the home’s value is lower than expected or you switch loan programs.
6. Get your home appraised
Most loan programs require a home appraisal to verify your home’s value. A licensed home appraiser inspects the home and compares it to recent nearby home sales with similar features. If you’re eligible for an appraisal waiver, make sure you still get a home inspection to check for any major issues with the home’s working parts. You may even want to consider a home warranty to cover major repairs within the first year if you’re buying a home.
If you’re eligible for a VA interest rate reduction refinance loan (IRRRL) or an FHA streamline refinance, the mortgage process doesn’t require an appraisal.
7. Check your closing disclosure
You’ll receive a closing disclosure at least three business days before your closing date with a detailed breakdown of all the costs and final amount you need to bring to closing. Check the figures to make sure you get credit for anything you’ve paid for (such as appraisal fees and upfront earnest money) and discuss anything out of the ordinary with your loan officer.
8. Prepare for closing and get your keys
During the mortgage closing process, you’ll sign your papers at a title company, with an attorney or with a notary, depending on the closing practices in your area. Closing funds are usually wired, or you can get a cashier’s check from your bank. Once the documents are signed and your lender sends the mortgage money, the ownership is transferred into your name, and you’re officially a homeowner.
If you’re refinancing your primary residence, there’s an extra waiting period in the mortgage process called “rescission.” After you sign, three business days must pass before you’ll be able to get the funds from your refinance. During this period you have the right to cancel your loan.
Frequently asked questions
Who approves your mortgage?
The mortgage underwriter is the final decision-maker in the mortgage process. The underwriter must be able to validate all the information on your loan application to give you a final approval before closing.
How long does it take to get a mortgage?
For purchase loans, it took 52 days to close on a conventional loan, 54 days to close on an FHA loan and 62 days to close on a VA loan, according to ICE Mortgage Technology’s December 2021 Origination Report.
Refinances don’t take quite as long — conventional refinances were at 44 days, FHA refinances took 53 days and VA refinances usually took about 49 days.
Can I speed up the loan process?
Online lenders may have streamlined electronic mortgage processing systems that are faster than a traditional mortgage bank. Respond quickly to any requests from your lender to keep things moving along.
What causes delays in the mortgage process?
Common mistakes that can create delays include changing jobs, opening new credit during the mortgage process or depositing a large sum of cash without documentation.