How to Get a Mortgage

Before you start your home-buying journey, you need to know how to get a mortgage. Taking on a loan to finance the purchase of your home is one of the biggest financial decisions you’ll ever make. 

If you’ve never applied for one before, the mortgage process can feel complicated and stressful. You might be wondering how to get approved for a mortgage, what score you need, and how much home you can afford. The good news is that the process is more straightforward when you break it down into clear steps. 

Our guide on how to get a mortgage teaches you everything you need to know. You’ll learn what lenders look for when reviewing your application, and how to prepare for buying your first home. 

How to get a mortgage

Here’s how to get a mortgage:

Step 1: Check your credit and financial health

If you are preparing to buy your first home or think you are ready to take the leap, review your financial history. Your credit history gives lenders insight into how reliably you’ve handled debt in the past. A stronger credit profile can help you qualify for better loan terms and lower interest rates. 

Before applying for a mortgage, it’s smart to:

• Request copies of your credit reports
• Pay bills on time
• Reduce high credit card balances or pay them off
• Avoid taking on new debt before applying

You are entitled to a free credit report from each of the three major credit bureaus every 12 months. The bureaus are Equifax, TransUnion, and Experian. You can request all three at once or request them separately. 

If you’re still building credit or trying to strengthen your credit history, establishing consistent payment activity can help over time. Platforms like Kikoff help you add positive payment history to your credit report. With Kikoff, you can report on-time rent payments and eligible utility payments, which can help promote a better score. 

Step 2: Determine how much you can afford

Next, you need to figure out how much you can reasonably afford. Consider both the total loan amount and the monthly payment that fits your budget. The affordability of your mortgage will depend on your income, the down payment amount, the interest rate, and the total amount borrowed.

There are plenty of online mortgage estimation tools that allow you to run calculations. Be realistic when entering the interest rate and down payment amounts. Use one of these tools to explore different scenarios. 

For example, saving until you can put 20% down could delay your home-buying process. However, you would have a cheaper mortgage, avoid PMI, and save tens of thousands in interest over the life of the loan. 

Step 3: Save for a down payment 

Your down payment is the amount you pay up front toward the home’s purchase price. While many people believe that they have to put 20% down to buy a home, that’s not always the case. There are plenty of mortgage options that offer lower down payment amounts. 

For example, conventional loans typically require 3-5% down. FHA loans require 3.5% down. USDA and VA loans are only available to eligible borrowers, but they have 0% down options. 

Making a larger down payment may help lower your monthly payment and reduce your costs over time. You may also need to make a larger down payment if your credit score is lower. 

Once you find a lender, you can discuss different down payment options with them to see how paying more could impact your monthly mortgage payments. However, you should also consider your closing costs, which are separate from your down payment.

Typically, closing costs range from about 3-5% of the home’s purchase price. These funds are used to cover property taxes, your homeowner’s insurance policy, and set up an escrow account.  

Step 4: Get prequalified or preapproved

Before you make an offer on a home, you’ll need to get prequalified or preapproved. While the terms sound similar, they are not the same. A prequalification is based on self-reported financial information. It’s not a good indicator of your eligibility. 

Preapproval is a more detailed process. The lender will verify your income and run a credit check. That way, they are basing their preapproval on your actual score rather than self-reported information. 

Getting pre-approved can also help you understand how much you are eligible to borrow. Remember, just because you can finance a certain amount doesn’t mean you should. With that in mind, find out how much your mortgage will be based on your preapproval amount. That figure does not always account for fees like PMI or homeowner’s association fees. 

Step 5: Start house hunting

Now you are ready to start house shopping. Many homebuyers work with a local real estate agent to help them find a home. An experienced agent can help you explore different neighborhoods and walk you through the home-buying process. When you find a home you are interested in, they will also write up the offer. 

You should also make a list of must-haves and nice-to-haves. When creating your list, identify basics such as:

• Location preferences
• Bedroom and bathroom requirements
• Optional features, such as a pool

Your real estate agent will use this information to narrow down their search efforts and present options that check all of the boxes for you. When you find the right home, you’ll submit an offer. If the seller accepts, the mortgage process moves forward. You will also enter an inspection period, where you can schedule different types of home inspections. 

Step 6: Submit your mortgage application

After your offer is accepted, you’ll complete a full mortgage application with your chosen lender. The lender will request all sorts of documentation, such as:

• Pay stubs
• Tax returns
• Bank statements
• Employment verification
• Credit history

You can get some of this information ready in advance. For example, track down your tax returns so that you can promptly turn everything in. The sooner you get the documents to the lender, the easier it will be for them to give you a clear to close (CTC). 

Step 7: Underwriting and approval 

During underwriting, the lender is going to perform a thorough analysis of your financial situation. Underwrites evaluate:

• Credit history
• Debt-to-income ratio
• Income stability
• Assets and savings
• The appraised value of the property

The underwriter may ask for additional documentation. This is normal. Don’t get discouraged. The lender is doing its due diligence before financing the purchase of your home. The process is going to feel tedious at times. 

Step 8: Closing on the home 

Once the mortgage is approved, the lender will give you a CTC. At closing, you will pay closing costs and the down payment. You will also sign the final loan documents and take possession of the keys to the home. 

What is a mortgage?

A mortgage is a loan used to purchase real estate, typically a home. Instead of paying the full purchase price up front, you make a down payment and finance the remaining balance through a lender. You will repay the loan over 15 or 30 years, although there are other terms available. Your monthly payments usually include:

• Principal: The amount you borrowed 
• Interest: The cost of borrowing money 
• Property Taxes: Often collected by the lender and paid to the local government 
• Homeowners Insurance: Protects the property 

If you put less than 20% down, you will also need private mortgage insurance (PMI), which protects the lender if you default on the loan. Since mortgages are large loans with long repayment periods, lenders carefully evaluate your financial profile before approving you.

When learning how to get a mortgage, you need to consider all of these different factors. Lenders will dive deep into your credit history, review your score, and assess your debt-to-income (DTI) ratio. They are assessing how risky or safe it is to loan you money.

Mortgage requirements

Learning how to get approved for a mortgage means understanding the various loan requirements, which are as follows:

Credit score

Your credit score is calculated based on the information in your credit report, including:

• Payment history
• Credit utilization rate
• Age of accounts
• Credit mix

In general, you should aim for a credit score of at least 620. That will help you qualify for FHA and conventional loans. You may need a score of at least 640 to qualify for a USDA loan. However, meeting the bare minimum score requirements will not unlock the best rates. If you want better interest rates, you will need a higher score. 

DTI

Lenders also look at your monthly debt-to-income ratio (DTI). Most lenders prefer a DTI below 43%, although some programs allow you to have a higher ratio. If you think your DTI may be too high, work on reducing your existing debt by paying off credit cards, personal loans, or vehicle loans. 

Calculating your DTI can be tough. Speaking to a lender will help you understand what your DTI is and whether it is low enough or not. If your DTI is too high, a lender may be able to help you create a plan for getting your ratio below the target threshold. From there, you can pay off recurring bills and make yourself a more appealing option for lenders. 

Income

Lenders want to see that you have a reliable income. Typically, you’ll need at least two years of consistent work history with the same employer or in the same role/field. Lenders usually require two years of tax returns, and they will also verify your employment. 

If you are self-employed, you may have to provide additional documentation. However, you could still be eligible for a mortgage. A lender will help you understand what specific criteria you have to meet based on your situation. 

Down payment and savings 

Lenders want to see that you have enough money to cover the down payment and closing costs without zeroing out your bank account. A lender also needs to source the funds, which means they will verify where they came from. 

If you have been steadily saving money for months or years, that activity will show in your bank statements. However, if someone gifted you part or all of the down payment amount, you will have to complete additional paperwork. 

If you are looking for different ways to come up with a down payment, talk to your lender about first-time homebuyer assistance programs. These programs can help you cover closing costs and your down payment. 

You may even be able to close on a home with zero out-of-pocket spending if your agent can negotiate for the seller to cover some of your closing costs. 

There are plenty of creative ways to get deals done. If you have an eligible credit score and credit history, then it’s worth exploring your mortgage options. 

Types of mortgage loans

Now that you know how to get approved for a mortgage, it’s time to learn about the different types of loans that are available: 

Conventional loans

Traditionally, conventional loans required you to put at least 20% down. However, that changed decades ago. Now, lenders offer conventional loans with down payment requirements ranging from 3% to 20%. However, lenders typically require you to have a higher credit score and lower DTI compared to federally-insured options like FHA loans. 

However, a conventional loan could offer you a competitive interest rate if you are well-qualified. Additionally, your private mortgage insurance will automatically fall off the loan when the loan-to-value ratio falls below 80%. Most home-buyers compare FHA and conventional loans when exploring mortgage options. 

FHA loans

FHA loans are insured by the Federal Housing Administration. These loans are designed to help borrowers with lower credit scores or less money to put down. Standard FHA loans accept borrowers with credit scores of 580 or higher and only require 3.5% down. You may be able to qualify for an FHA loan with a score as low as 500, but you will be required to put 10% down. 

Since you’ll be putting less than 20% down, your FHA loan will have PMI. The downside is that PMI does not automatically fall off of FHA loans. Instead, you will have to refinance once you hit the 80% equity threshold. 

VA loans

VA loans are only available to eligible veterans, active duty service members, and select family members. VA loans offer several advantages compared to traditional mortgages, including:

• No down payment requirement
• No private mortgage insurance
• Competitive interest rates 

If you are eligible for a VA loan, make sure you choose a lender with experience in this area. VA loans are subject to unique inspection requirements and more stringent underwriting, which are meant to protect borrowers. However, the perks make them a worthwhile option. 

USDA loans

USDA loans are designed for homes in eligible rural and suburban areas. Typically, you’ll need a 640 credit score or higher to qualify. Benefits include no down payment requirements and lower interest rates for qualified borrowers. 

However, you’ll have to find a home in an eligible area and meet income limits. Fortunately, the income limits are relatively high, especially for couples. If you think that a USDA loan may be a good fit for your home-buying journey, speak to a lender for more information. 

How to choose the right mortgage lender

Choosing the right lender can make a huge difference in your mortgage experience. When comparing lenders, consider factors such as:

• Interest rates
• Fees and closing costs
• Customer service
• Loan options

Some lenders primarily handle specific types of loans, whereas others offer all loan types. Since interest rates are set based on market conditions, most lenders will have similar offers based on your score. Still, it’s worth comparing at least two to three options before making your decision. 

First time homebuyers assistance programs

There are several programs available to help first-time homebuyers afford a home. These programs may provide perks and support, such as:

• Down payment assistance
• Reduced interest rates
• Tax credits
• Closing cost support

Talk to your lender or conduct a quick Google search to learn more about programs in your area. These programs may be offered by federal housing agencies, state housing authorities, or local governments. Some nonprofit organizations also offer and fund downpayment assistance options. 

If you are eligible, you could save thousands in out-of-pocket costs. However, it’s important to do your research and understand the terms of these programs, as some require you to repay the money. 

Conclusion

Building a strong credit score is one of the first steps toward getting a mortgage with favorable terms. If you need to add positive history to your report, Kikoff can help. With Kikoff, you can report verified rent and utility payments to the credit bureaus, which strengthens your credit history and builds your score.

Start building a positive credit history with Kikoff.