How to Apply for a Mortgage

With so many details to consider, applying for a mortgage might seem as stressful as it is exciting. Knowing what to expect — and how to prepare — could give you more confidence as you cross the threshold to home ownership.

What to do before you apply for a mortgage

Taking these steps before applying for a mortgage may make the process go more smoothly.

Step 1. Decide how much home you can afford

Focusing your hunt on houses in your budget could save time and help you avoid taking on a mortgage that’s too costly to manage.

Using a mortgage calculator tool, like the one offered by the Federal National Mortgage Association (Fannie Mae), can give you a rough estimate of what you could afford to borrow. Some lenders may also allow you to prequalify for a mortgage, giving you a general idea of what loan amount you might expect based on self-reported financial details. Just remember that calculator results and prequalification don’t guarantee loan approval.

When setting your homebuying budget, consider these factors:

Debt-to-income ratio

Lenders look at your debt-to-income ratio (DTI) to understand how much money you might be able to afford to put towards your monthly mortgage payment. Your DTI is the percentage of your monthly income that you spend on existing debt.

Your DTI can be calculated by adding up your monthly debt payments and dividing that number by your monthly gross income (the amount you earn before taxes). Then, you can multiply the result by 100 to find the percentage.

Mortgage lenders usually look for a DTI below 36% when approving loans.¹ A higher DTI might make it more difficult to get approved, while a lower DTI could open the door to a higher loan amount, lower interest rate or smaller monthly payments.

Knowing how much of your income is already committed each month may help you decide on a payment range that feels realistic. Even if a lender approves you for a bigger loan, picking a home that’s more affordable might give you some extra breathing room in your budget.

Down payment

For most home loans, you’ll need to make an upfront payment, called a down payment. A down payment is often between 3% and 20% of the price of the home depending on the type of loan.² Some loan programs may allow a lower down payment if you meet certain qualifications. If you can afford it, making a higher down payment could help you save money on interest over the life of the loan. Note that if you put down less than 20% on a conventional mortgage, you may need to pay for private mortgage insurance (PMI), which protects the lender if you’re unable to make payments.³

Closing costs

Closing costs are another upfront cost to consider. Closing costs are fees to cover things like appraisals, title insurance and record filing.⁴ In some cases, your lender may allow you to roll closing costs into your mortgage, but in others, you may have to pay them out of pocket. Typically, closing costs add up to 2% to 5% of your loan amount.⁵

Recurring costs

When mortgage lenders calculate your loan amount, they don’t always account for ongoing expenses that you’ll need to budget for as a new homeowner. Consider how these costs will fit into your finances along with your monthly mortgage payment:

• Property taxes: Property taxes are charged by your local government on an annual basis. Sometimes they’re included in your mortgage payment. In this case, the taxes will go into an escrow account, and the lender pays the taxes from there. If not, you’ll need to pay them directly. The amount of property taxes you pay may vary depending on the location and value of a house. Ask the seller about their latest tax bill or check the real estate listing to get an idea of these costs before making an offer.^6,7
• Homeowners insurance: Homeowners insurance protects your home against risks like fire or storm damage. Many mortgage lenders require you to have homeowners insurance.⁸ Like property taxes, homeowners insurance premiums may vary depending on the location and value of a house. Homeowners insurance is sometimes factored into monthly mortgage payments — the payment goes into an escrow account like taxes — but not always.⁹ You can request quotes from multiple insurance companies to compare potential premiums.
• Maintenance: Setting aside a small portion of your budget each month can make surprise expenses, like replacing a roof or repairing an HVAC, easier to handle. If you’re not sure how much to save, consider setting aside one percent of your home’s value for typical maintenance and up to an additional three percent for repairs.¹⁰ If you don’t yet have an emergency fund, now could be a good time to start one.
• Equipment and utilities: You’ll also need to cover essentials like water, electricity, heating and potentially new equipment like appliances or lawn care tools.
• Homeowners association (HOA) fees: Depending on where you live, you may also be responsible for ongoing HOA fees. These fees cover maintenance and service requests for common areas and shared community amenities. Note that not all properties have HOA fees.

While they’re not recurring, you’ll also need to decide how to pay for moving costs.

Step 2. Check your credit report

Lenders use your credit report to assess the risk of lending to you, determining if you’re eligible for a home loan and, if so, the interest rate you’ll receive. Before applying for a mortgage, it’s a good idea to review your credit report to understand how your financial history may impact your approval odds. By law, you’re entitled to a free copy of your credit report from all three major credit bureaus (Equifax, Experian and TransUnion) once a year, but you can now access your credit report for free each week.¹¹

If there are any errors on your credit report, such as an outdated balance amount, follow Federal Trade Commission (FTC) guidelines to file a dispute.¹² Unfamiliar names, addresses, Social Security numbers, accounts or loans on your credit report could be a sign of identity theft. If anything seems suspicious, report it to the FTC and local law enforcement.

If anything seems incorrect on your credit report, consider waiting to apply for a mortgage until any errors are corrected.

Step 3. Compare mortgage lenders and loan options

Choosing the right type of mortgage is just as important as choosing the right home. Consider a variety of loan options to find the down payment, term and interest rate that best fit your financial situation.

Mortgage rates can be fixed or adjustable. With a fixed-rate mortgage, your interest rate and monthly payment stay the same for the life of the loan.¹³ However, with an adjustable-rate mortgage (ARM), the interest rate is fixed for an initial time period, then adjusts up or down to market conditions at set intervals.¹⁴

Mortgages vary in other ways, too. Some are backed by private lenders, while others are backed by government agencies. Some types of mortgages require smaller or larger down payments than others. Let’s look at some common types.

• Federal Housing Administration (FHA) loan: An FHA loan is a government loan that is designed to be accessible to people with less-than-perfect credit. For applicants with credit scores above 580, FHA loans generally require a down payment of 3.5%. Applicants with credit scores between 500 and 579 typically need to put down 10%.¹⁵
• Conventional loan: You may be able to get a conventional loan — a mortgage that’s not backed by the government — with as little as 3% down, depending on the loan program, your credit score and whether you’re using the home as a primary residence.¹⁶ Interest rates can be fixed or adjustable but may be higher than those of government-backed loans.¹⁷ A conventional loan may be conforming, meaning it has a maximum amount set by the government, or non-conforming, meaning it does not have a government-set maximum.¹⁸
• United States Department of Veterans Affairs (VA) loan: VA loans are also backed by the government. VA loans are only available to eligible servicemembers and veterans, and don’t usually require a down payment.¹⁹
• United States Department of Agriculture (USDA) loan: Designed for homebuyers purchasing a home in eligible rural and suburban areas, USDA loans are backed by the government and do not require a down payment.²⁰

Many lenders offer multiple types of loans. For example, a single lender could offer USDA loans and FHA loans. That said, interest rates, terms and fees for the same loan type could still vary between lenders.

5 Steps to apply for a mortgage

The mortgage process may vary between lenders but generally includes these five steps.

Step 1. Get preapproved

When you’re serious about making an offer on a home, you’ll generally need preapproval from a bank or mortgage lender. While it’s not a guarantee of loan approval, a preapproval gives a clearer picture of your potential borrowing power.

To get preapproved for a home loan, you may need to provide financial information, such as:

• Pay stubs
• W-2s or other proof of employment
• Tax returns
• Bank statements
• List of debts and expenses²¹

A preapproval also involves a hard credit check, which can cause a small, temporary dip in your credit score. You can seek preapproval from more than one lender to narrow down your options. If you submit more than one preapproval application within 45 days, most credit scoring models treat them as a single inquiry.²²

Step 2. Submit mortgage application

After you receive your preapprovals, it’s time to submit a formal application to the lender you’re most interested in working with.

You’ll be asked to provide additional documents or details about the information you provided during preapproval. Responding quickly could help keep your application moving forward.

Step 3. Review the loan estimate

After you submit your application, the lender will provide you with a loan estimate. A loan estimate is a three-page document describing the proposed terms of a mortgage based on information you provide in your application.²³ A loan estimate is not a binding offer, but it does give you an idea of what to expect if you decide to move forward.²⁴

Within a loan estimate, you’ll find details like:

• Total loan amount
• Interest rate
• Estimated monthly payment
• Fees and closing costs
• Homeowners insurance requirements
• Refinancing restrictions
• Late payment policies

You’ll also see your “cash to close,” which combines your closing costs with other upfront funds, like your down payment.²⁵

Loan estimates expire within 10 business days, so let the lender know as soon as possible if you decide to accept it.²⁶ You may need to sign the loan estimate or pay an application fee to move forward. Your lender will let you know what you need to do to proceed.

Once you accept a loan estimate, the lender will also arrange an appraisal of the home you want to buy to estimate its market value, based on factors like the location, condition of the property, and recent home sales nearby. An appraisal takes about two weeks to complete and usually costs between $450 and $700.²⁷

Step 4. Go through the underwriting process

Underwriting is the process that lenders use to determine the level of risk involved in lending money. The lender uses an underwriter to verify the information in your application, including your credit score, DTI, income and home appraisal. The process usually takes up to 50 days to complete.²⁸

While it can be uncomfortable to have someone look so deeply into your finances, it’s best to be honest. Offering a clear explanation of any past credit challenges helps show your lender you’ve moved forward and are ready to borrow responsibly. If your application is denied after underwriting, be sure to ask why. You may be able to rectify some of the issues — like paying down debt if the underwriter determined your DTI was too high — and reapply.

Step 5. Close on your home

With final loan approval in place, you’ll sit down with the seller (or their agent) and your real estate agent to sign your closing paperwork. Depending on your state, additional people may be present, such as an escrow officer, who handles any funds that are exchanged, or a settlement agent, who’s responsible for the legal transfer of title and ownership of the property.²⁹

You may not have much time to review your documents during closing. Ask your agent to provide the documents ahead of time, so you have a chance to read them more carefully.³⁰ After signing, you’ll have three days to review the documents, confirm they match what you agreed to and raise any concerns with your agent or lender.³¹

You’ll also do a final walkthrough of the property before paying your closing costs and down payment via wire transfer, cashier’s check or certified check, depending on your lender.³² You may want to bring a folder or briefcase along, since you’ll receive a copy of the documents you’ve signed for your records.

Finally, if everything is as expected, you’ll walk away with the keys to your new home.

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Start strong on your path to home ownership

Buying a home is an exciting milestone worth celebrating — and worth preparing for. From viewing your first listing to holding keys in your hand, it’s important to stay informed about the mortgage process and ask questions as needed. Taking the time to learn how to apply for a mortgage is a smart first step that can give you peace of mind as you move forward with the process.

Sources:

1 https://www.bankrate.com/mortgages/why-debt-to-income-matters-in-mortgages/#how-to-calculate
2 https://yourhome.fanniemae.com/buy/homebuyer-down-payment
3 https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/
4 https://www.investopedia.com/terms/c/closingcosts.asp
5 https://myhome.freddiemac.com/buying/closing-your-loan-when-buying
6, 9 https://www.experian.com/blogs/ask-experian/are-property-taxes-included-in-mortgage/
7 https://www.nar.realtor/the-facts/consumer-guide-property-taxes
8 https://www.bankrate.com/insurance/homeowners-insurance/home-insurance-required/
10 https://www.bankrate.com/home-equity/most-expensive-home-maintenance-costs/#how-much
11 https://consumer.ftc.gov/consumer-alerts/2023/10/you-now-have-permanent-access-free-weekly-credit-reports
12 https://consumer.ftc.gov/disputing-errors-your-credit-reports
13, 14 https://www.bankrate.com/mortgages/basics-of-adjustable-rate-mortgages/#how-they-work
15 https://www.bankrate.com/mortgages/what-is-an-fha-loan/
16, 17 https://www.bankrate.com/mortgages/what-is-a-conventional-loan/
18 https://www.consumerfinance.gov/owning-a-home/conventional-loans/
19 https://www.va.gov/housing-assistance/home-loans/loan-types/
20 https://www.nerdwallet.com/article/mortgages/usda-loan
21 https://www.experian.com/blogs/ask-experian/what-documents-are-needed-for-mortgage-preapproval/
22 https://www.experian.com/blogs/ask-experian/do-multiple-loan-inquiries-affect-your-credit-score/
23, 24, 25, 26 https://myhome.freddiemac.com/blog/homebuying/everything-you-need-to-know-about-loan-estimates
27 https://www.fdic.gov/consumer-resource-center/2023-06/understanding-appraisals-and-why-they-matter
28 https://www.bankrate.com/mortgages/steps-in-underwriting-process/
29 https://www.consumerfinance.gov/ask-cfpb/who-should-i-expect-to-see-at-my-mortgage-closing-en-1903/
30, 31 https://myhome.freddiemac.com/buying/closing-your-loan-when-buying
32 https://www.investopedia.com/mortgage-process-explained-5213694