Unless you can afford to buy a home in cash, you’ll need to get a mortgage. When you’re serious about buying a home, it’s important to understand the mortgage process and see how much mortgage you can qualify for.
Step 1: Know your numbers
The first step in preparing to apply for a mortgage is to document your monthly debt and income. Lenders look at your debt-to-income ratio to determine how much you can afford to borrow. Typically your total debt, including a new home payment, should not exceed 43% of your income.
What credit score do you need to buy a house?
Another important factor is your credit score. Your lender will run a credit check when you apply for pre-approval, but it’s a good idea to get your own credit report to see if there’s anything you need to work on before applying.
Not missing payments and paying off as much debt as you can will help increase your credit score while lowering your debt-to-income ratio.
RE/MAX Agent Tip: Be careful not to change jobs, take out new debt, or do anything that could negatively affect your credit score before or after applying for a mortgage.
Step 2: Find a lender
The most common types of lenders are banks, credit unions, and online financial institutions. Not all lenders offer the same rates or loan types, so it’s important to shop around. Talk to at least four different lenders and try to compare loan rates, fees, and product attributes.
RE/MAX Agent Tip: It’s nice to get the lowest interest rate, but remember it’s also important to select a mortgage lender that is fast, trustworthy and communicates well since they will be very involved in the closing process.
For recommendations on mortgage lenders, see who Redfin clients recommend here or ask a Redfin Agent who she or he trusts in your area.
Unlike a pre-approval, pre-qualification is a quick, informal process that allows you to compare loan details from different lenders before getting pre-approved.
Typically during a phone call or meeting with a lender, you’ll go over your income, assets, and debt. While it’s important to be honest, for a pre-qualification your financial information will not be verified by the lender. Based on that information, the lender will provide a rough estimate—not a guarantee—of how much money and what types of loans they can offer you.
Step 3: Get pre-approved
Once you select a lender, you should apply for mortgage pre-approval. Sellers are typically more willing to accept offers from pre-approved buyers because pre-approval shows that the buyer has the financial resources available to make good on their offer.
When you apply for pre-approval, your lender will check your credit and ask for all financial documents to accurately assess your financial situation.
In addition to two forms of government identification, you’ll also need:
- W2 forms from past two years
- Pay stubs for past 1 to 3 months
- Personal tax returns for past two years
- Business and personal tax returns for past two years
- Year-to-date profit and loss statements
- Year-to-date balance sheet
Names, balances, and account numbers for all of the following:
- Credit cards
- Car, student, or any other loans
- Store lines of credit
- Other consumer debt with recurring monthly payments
- Alimony payments
- Child support payments
- Divorce Decree
- Documentation of down payment, such as checking and savings statements (all pages) showing account balances for two previous months
- Documents showing sources of any large deposits—if parents are helping out
Investments and other assets
- Stocks, bonds, or other investment account statements for two previous months
- Retirement account statements, including 401(k) and IRA
- Names and phone numbers of landlords for two previous years
- Current mortgage documentation for two previous years
RE/MAX Agent Tip: There are special types of loans for military veterans, first-time homebuyers with good credit, etc. Ask your mortgage lender if you qualify for any of these.
Once you’re approved, you’ll receive a pre-approval letter. When you find a home you want to buy, your real estate agent will give the seller a copy of your pre-approval letter along with your offer.
Step 4: Set your own budget
Keep in mind that just because you’re pre-approved for a certain amount doesn’t mean you can actually afford that amount. Prepare your own monthly budget to be sure.
Typically, your total house payment (including fees, taxes, and insurance) should not exceed 35% of your gross (pre-tax) income, but it’s recommended to stay closer to 25%.
RE/MAX Agent Tip: When calculating your budget, your total housing payment is important, but also consider closing costs, monthly homeowner’s association (HOA) dues, utilities, and general home upkeep.
Step 5: Finalize your mortgage and close
Once you make an offer that is accepted, let your lender know right away so she or he can get the loan process started. This takes 30 days on average. Your lender will be in close contact with you, your agent, and the escrow agency throughout the closing process.
Secure your mortgage
If you haven’t done so already, submit a formal loan application to your lender. Then your lender will send you an official Loan Estimate with your estimated closing costs. Review these documents closely, ask any questions you have. When everything looks good, send your lender an intent to proceed.
Your bank will need to see an official home appraisal to make sure the home you’re purchasing is worth what they’ve committed to lending you. You can either pay for your appraisal upfront or have it added to your closing costs. Performing the appraisal is often the longest step in the approval process, so it is important to deliver your sales contract and order the appraisal with your lender as quickly as possible.
Your lender will create a loan file and send it to an underwriter. The underwriter will review the entire loan package and make sure all requirements are met. Sometimes the underwriter may request additional documentation from you. If this is the case, it’s important that you submit the documents as quickly as possible. Once underwriting is complete, your loan is considered approved and your closing date will be scheduled.
Once your loan is approved and final closing costs are established, you’ll have to:
- Submit a cashier’s check for your down payment and closing costs.
- Provide copies of two forms of government identification.
- Provide proof of homeowner’s insurance.
- Review your final loan documents to make sure your interest rate, loan terms, names, and addresses are correct.
- Sign your loan documents.
If your closing is executed smoothly, all of the money and documents associated with the transaction will be distributed to the proper parties, and you’ll get the keys to your new home!