How To Get a Mortgage (2023)

Buying a home is likely the most important financial decision and investment you’ll ever make. Homeownership provides financial stability and creates institutional wealth that you can pass on to later generations. In America, if you want to own a home, several options are available, like paying with cash or using a system called “rent to own.” But the most common and financially viable method for homeowners is a type of loan called a mortgage. 

Mortgages are a standard and essential part of the real estate market, and understanding how they work is necessary for purchasing a home in the U.S. Unfortunately, mortgages can be complex, with several different varieties and options available. This article will make buying a mortgage easy by breaking down everything you need to know, from pre-application to signing the closing documents. 

What Is a Mortgage?

A mortgage, also referred to as a mortgage loan, allows a would-be homeowner to borrow money to purchase a home. The key difference between a mortgage and other loans is that if the borrower defaults on the loan, the lender can repossess the home. In other words, a mortgage allows you to borrow the needed money to purchase a house, but failure to repay those funds over the course of the loan can result in you losing it. 

Who Are the Parties Involved in a Mortgage?

Before we get into the nitty-gritty of the mortgage application process, there are a few things you’ll need to know about these kinds of loans. First, let’s look at all the potential parties involved in a typical mortgage loan. 

Lender 

The lender is the company or institution you borrow money from to purchase your home. Lenders can include banks, credit unions, online mortgage companies, or private lenders (small businesses or individuals). Choosing the right lender is important for several reasons, as your lender will determine the quality of your loan, the interest rate, the lifetime of the loan, the necessary qualifications, and the down payment. 

We recommend thoroughly vetting your potential lenders beforehand by checking their online presence, reviews, ratings, and available loan information. If you’re concerned about the authenticity or credibility of a lender, you can look into its active license with the Nationwide Mortgage Licensing System & Registry (NMLS) – this is a database of all the licensed loan brokers in the United States. You can also contact your state regulatory agency to find out about any complaints or disciplinary actions taken against a lender. 

Borrower

The borrower is the individual (or multiple individuals referred to as co-borrowers) looking to take out money to purchase a home. 

Co-signer 

A co-signer is an additional individual who agrees to become legally responsible for the borrower’s debt in the case of defaults. Co-signers become responsible for the loan payments if you cannot afford them. In the case of poor or nonexistent credit history, a lender may require a co-signer before authorizing a loan. 

What Kinds of Mortgages Are There? 

Now that we know the main groups involved with the mortgage process, we can move on to the options available when taking out a loan. Numerous mortgage loans are available to homeowners, each with its own advantages, disadvantages, and qualification requirements. 

All types of loans fall into two broad categories of mortgages: conforming and non-conforming. Conforming loans are called such because they conform to the loan standards set by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are companies created by the United States Congress in 1938 and 1970, respectively, to aid in the reliability of mortgage loans by supplying the market with fresh and consistent funds. These companies purchase loans from lenders and either hold them in their portfolios or package them into Mortgage Backed Securities (MBS) to be resold. This process continuously injects liquid funds into the mortgage market, allowing lenders to continuously and safely invest in new loans, creating market stability. 

Conforming Conventional Loans

These are the standard mortgage loans most homeowners aim to take out. These loans are not government-backed but still meet the Fannie Mae and Freddie Mac standard. These mortgages are preferable due to their low upfront cost, only requiring a down payment of 3% of the total cost of the loan. However, a down payment of less than 20% typically will result in the borrower needing to take out Private Mortgage Insurance (PMI) to cover the risk of default. 

To be considered a conforming loan, a mortgage must meet the following criteria:

• The loan applicant must have a minimum credit score of at least 620. 
• The loan must have a baseline loan limit of $726,200, up 12.21% from 2022. 
  • The loan limit is higher for areas with an increased median housing cost, such as New York or Hawaii, and is instead $1,089,300.
• The borrower must have a maximum debt-to-income ratio (DTI) of 43%.
• The borrower must make a down payment of at least 3% of the loan’s total value.

Non-conforming Home Loans

A non-conforming loan is any mortgage that doesn’t fall within the standards set by Fannie Mae and Freddie Mac. Two kinds of loans generally fall into this category: those with higher baseline loan limits (referred to as “jumbo loans”) or government-backed loans. 

Government-backed Loans

Most lenders offer a selection of loans insured by the United States Government, meaning that the government protects the lender in the case of default. As a result, these loans carry little to no risk and have a lower down payment and credit requirements than traditional loans. Government-backed loans come in several forms and are geared toward helping first-time homebuyers, those from low-income households, or those with historically low credit. The most commonly offered government-backed loans include the following: 

• FHA Loans — These loans are backed by the Federal Housing Administration (FHA) through the Department of Housing and Urban Development. They’re designed to help medium to low-income borrowers and are popular amongst first-time homeowners. FHA loans have a higher down payment amount of 3.5%, lower credit requirement of 580, and a longer lifetime. These loans also have a lower baseline loan limit of $472,030 for 2023. 
• USDA Loans — A U.S. Department of Agriculture (USDA) loan allows homeowners to move to rural areas for as low as 0% down. However, you’ll have to fall below 115% of the region’s median income threshold, have a credit score of at least 640, and have a debt-to-income ratio of 41% to qualify. Like all other loans, USDA loans have a loan limit based on median household costs for the area, but most have a baseline of $726,200.
• VA Loans — Backed by the Department of Veterans Affairs, VA loans are available to active duty service members, retired service members, eligible members of the national guard, and qualifying military spouses. These loans are some of the best out there as they don’t require a down payment, have low interest rates, and their fees can be wrapped into the loan, avoiding upfront costs. 

“Jumbo” Mortgages

A mortgage that exceeds the standard spending limit set by the Federal Housing Financing Agency is considered a jumbo mortgage. These loans are often considered a higher risk, requiring down payments of 10% to 20%, high credit scores, low debt-to-income ratios, and, typically, large amounts of paperwork. These loans allow you to borrow substantial amounts of money for larger home purchases. 

Fixed-rate or Adjustable Rate 

The last major thing you need to know about mortgage types is how their rates are applied. Mortgage interest rates fall into two categories, fixed-rate or adjustable rate. A fixed-rate mortgage will have the same interest rate over the loan’s term. While adjustable rate mortgages (ARM) will have a temporary fixed rate, called a teaser rate, that typically lasts for five to 10 years. Once this time has expired, the loan rate will change depending on the current market, determined once every six months to a year. 

How Do You Apply for a Mortgage?

Now that we know what kinds of mortgages exist, we can look at the application process. Remember that the following information will reflect conventional conforming mortgages, as they’re the most common. Other, more specialized mortgages, like VA of USDA loans, will have different qualifications. Furthermore, some loans require special documentation and possess different application processes. When applying for a loan of any kind, always thoroughly review the application rules and contact the lender if you have any questions.  

Step 1: Get Finances in Order

The first thing any mortgage company will look at is your finances. Your lending company will want to review everything from your credit rating to your DTI and available funds. So, before starting a mortgage application or considering your loan options, you must first review your financial status. 

Begin by looking at your credit score. Ideally, you’ll want a score north of 700, but so long as it’s above 620, you’ll still be eligible for a standard loan. A higher credit score will typically translate into a lower interest rate, so increasing your score before applying can greatly benefit you on month-to-month payments. You’ll want to check your score three to six months before applying. 

Next, you’ll want to determine if you have enough assets to cover a reasonable down payment. At a minimum, you’ll need to pay 3% of the home’s price, or purchase price, upfront. Typically, the higher your down payment, the lower the interest rate, so paying more upfront will help you reduce your monthly mortgage bill. You can also use the wide variety of free online mortgage calculators to help give you an idea of potential mortgage costs and down payments. 

The last part of your financial situation you’ll want to get in order is your monthly debt. You calculate your DTI by adding up all your monthly payments, then dividing that by your gross monthly income. The final percentage is your debt-to-income ratio, which must be lower than 43% to qualify for a conventional mortgage. Remember that this calculation only applies to debts, such as credit card payments, student loans, etc., and does not include rent, other mortgage payments, groceries, or utilities. 

Step 2: Gather Your Documentation 

Once you begin the application process for your mortgage, you’ll be required to fulfill documentation requirements from the lender. The documents lenders will ask for can be extensive and in-depth, and you can save time by preparing these files beforehand. When applying for a mortgage, you’ll typically need to supply the following: 

• Proof of income: 
  • At least two years of federal tax returns
  • The last two years’ W-2 forms
  • Pay stubs from the last 30 days 
  • Other income sources reported through 1099 forms 
    • If self-employed, you’ll need your profit and loss statements
  • At least two months’ worth of bank statements
  • Documentation on long-term debt, such as student loans, child support payments, etc. 
  • Documentation regarding child support, alimony, or other income
  • A letter of employment from your current employer
• Personal identification and credit documentation:
  • A valid ID and Social Security number (SSN)
  • A verbal or written agreement allowing the mortgage lender to check your credit report
• Asset verification documentation:
  • Proof of gift funds 
  • Various account statements
  • Proof of sale for sold assets, such as a title transfer for a car or home

Step 3: Pick the Best Mortgage

Now that your documentation is ready, you should consider the right mortgage and lender to suit your needs. While most Americans opt for a standard conventional conforming mortgage, many homeowners can benefit from government-backed loans. An FHA loan could be a good choice if you have a lower credit score but more funds for a down payment. Or, if you don’t mind living in a rural community, USDA loans can be useful for their nonexistent down payments and low-interest rates. VA loans are great if you’re an active duty or retired military service member. 

One of the best things you can do when shopping for a home is mortgage preapproval. Essentially, this is when a mortgage company lets you know how much it’s willing to lend you. This process will also tell you your mortgage’s estimated monthly payment and interest rate before you lock in your home. With a preapproved loan, you can better know what kind of house you can afford, making the home-buying process quicker and easier. 

When shopping for a lender, remember that preapproval and prequalification are two different things. Prequalification is a rough estimation that lenders often use to draw people into applying for preapproval. 

Step 4: Submit Your Preapproval Application

Once you have your lender and the type of mortgage you want to get preapproved for, it’s time to apply. Reach out to the lender and request a preapproved loan application. You’ll then need to submit all the required documentation to your loan officer, then wait on underwriting and approval. 

Step 5: Wait for Underwriting and Verify Information if Needed

Now that your information has been sent to the lender, its underwriting team will assess if you qualify for the loan. You may be asked to supply more information or documentation during this process. Underwriting can take between three to 10 business days, after which the company will send you either a denial or an approval letter and an initial loan estimate. The loan estimate will include the maximum mortgage amount you qualify for, your estimated monthly payment, and your interest rate. Once you have your approval letter, you can begin house hunting. 

Step 6: Finding a Property

Next, you can look for the right property to suit your needs. We recommend connecting with a local real estate agent, especially if you’re buying a home for the first time. With the information you can provide from the preapproval letter, they will be able to find a property that falls within your budget. Once a property is picked out, the agent will make an offer and negotiate with the seller on your behalf. If the seller agrees with your offer, you can begin the final steps of the home-buying process. 

Step 7: Apply for the Mortgage Loan

Once you have a house locked in, you’ll have to apply for your mortgage loan – even if you’re preapproved, you’ll still need to submit a final application with your most recent financial information. During this verification process, the underwriters will look at your finances more closely and may request additional documentation. During this time, your lender will also confirm property information, including scheduling appraisals, verifying title authenticity, and scheduling state-mandated inspections. 

Once the final verification and underwriting process is complete, you’ll receive a closing disclosure. This document is the final form of the initial loan estimate and contains your closing costs, down payment, interest rate, and final monthly payment — closing costs are typically 3% to 5% of your total loan amount.

Step 8: Closing

Once you have read through your closing disclosure, you’ll need to attend a closing meeting. This meeting can include you, the home seller, one or both real estate agents, a mortgage broker, and a title company representative. During this meeting, you can ask any last-minute questions, pay your closing cost, and sign your loan. Once everything is said and done, you’re now officially a homeowner. 

Closing Thoughts on Homeownership, Mortgages, and Applications

While buying a home may be time-consuming, expensive, and daunting, it allows you to pass your wealth to later generations. This process works by slowly investing through payments toward your mortgage’s principal. While paying rent on apartments and condominiums provides you with housing, these funds are functionally lost when sent to your landlord — on the other hand, putting money toward your monthly mortgage payment increases your equity. Eventually, you’ll own your home outright, removing the need for payments entirely. Then you can eventually pass your home on, resell it, refinance it, or rent it out.

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