The Mortgage Loan Process: A Step-By-Step Guide

11 Min Read
Published Jan. 13, 2024
FACT-CHECKED
Written By
Kevin Graham
young family moving into new home

Suppose you’ve decided to buy a home and contacted a real estate agent who told you to call back after you’ve been “preapproved.” Immediately, you might have wondered, “What is preapproval?” or “How do I start the process of getting a mortgage loan?”

If you’re buying for the first time, the mortgage loan process is likely unfamiliar to you. Or it may feel complicated. It doesn’t have to be, though. Let’s walk through every step of the mortgage loan process so you can confidently navigate the road to homeownership.

9 Steps To Getting A Mortgage

Now it’s time to explore each of the major actions you’ll need to take on your home buying journey.

1. Get Preapproved

Getting a mortgage preapproval should be at the top of every home buyer’s to-do list. Before you even bother to see what houses are on the market, you should be reasonably confident in how much money a mortgage lender is willing to let you borrow – and this comes with preapproval.

Until a lender preapproves you for a mortgage, many real estate agents won’t be willing to give you much of their valuable time – especially in a seller’s market. A preapproval letter, or a Verified Approval Letter, shows real estate agents and sellers you’re serious about buying a house and can make a competitive offer.

The Mortgage Preapproval Process

When you get preapproved, a mortgage lender pulls your credit. This gives your lender access to your credit score and your credit report. Here’s a breakdown of the main items that your lender will consider during the preapproval process:

  • Credit score: The credit score you’ll need will vary with the type of home loan you apply for. For an FHA loan, you’ll usually need a minimum score of 580, although some FHA lenders accept a score as low as 500. A credit score of 620 or higher should qualify you for a conventional loan with most lenders. A VA loan doesn’t require a specific score, but each lender sets its own credit score guidelines.
  • Debt-to-income ratio (DTI): The lender will also likely ask about your income, assets and outstanding debt to calculate how much home you can afford based on your DTI, which is expressed as a percentage after dividing the sum of your monthly debt payments by your gross monthly income. DTI requirements often vary from one lender to the next.
  • Credit history: In addition to your credit score and DTI, lenders will see whether you’re buying a house after bankruptcy or with collections on your record. It’s still possible to get a mortgage with negative items on your credit report, but you may only qualify for certain loan options.

During the preapproval process, you’ll be matched with a preliminary loan program. Some borrowers end up changing their loan type later on, but getting initial approval is crucial even if your situation changes.

2. Prepare Your Documents

Most lenders require documentation of your debts, assets and credit history, along with proof of employment and income. The more information you can give your lender upfront, the stronger your preapproval will be because you and the seller will feel more confident that your loan will ultimately receive final approval.

Mortgage Application Documents

Let’s consider the documents you’ll need for the mortgage application process.

To verify your debts and assets, you’ll likely have to provide:

  • Bank account statements
  • If applicable, recent statements from your investment portfolio (retirement, stock and bond accounts, etc.)
  • If applicable, a gift letter and a receipt of gifted funds
  • Verification of any outstanding debts, such as auto loans or student loans
  • An explanation for any financial mishaps that might appear on your credit report, including bankruptcies, foreclosures or delinquencies

You’ll also provide verification of your employment and income. To do this, you’ll likely need:

  • The name, address and contact information of your current employer
  • 2 years of W-2s
  • 2 years of tax returns (1040 tax forms)
  • Profit and loss statements if you’re self-employed
  • Proof of child support, alimony or other income

You can provide income and asset documentation later on, at the underwriting stage, but submitting it upfront can give you a better understanding of how much home you can afford to purchase.

3. Determine Your Budget

Your preapproval letter will tell you how much money you can borrow. However, just because you’re preapproved for a certain amount doesn’t mean you should stretch your budget. Try using a mortgage calculator to determine a realistic estimate for monthly mortgage payments. In doing this, you’ll also want to factor in property taxes and homeowners insurance.

It’s important to make sure you have enough money left over every month to have a savings as well as cover all your other expenses along with any emergencies that might arise or any investments you plan to make. And don’t forget to also leave a little bit of room for personal enjoyment.

4. Start House Hunting

Looking at homes is usually the most exciting part of the mortgage process. Once you have your budget and wish list in place, it’s best to pair up with a real estate agent who knows the market and can help you find a home you love but that’s within your price range.

With help from your agent, you can attend open houses and privately view houses until you find a home that’s the right fit for you and your needs. As often as possible, your agent should join you for these visits so they can answer any questions you have and communicate your intentions to the seller’s agent.

5. Make An Offer

If you’ve found the perfect house that’s within your budget, it’s time to make an offer. Once you’ve communicated your intentions to your real estate agent, they’ll draw up what’s known as a purchase agreement, which is a document that includes your purchase offer and a list of anything from the house you want to be included in the sale.

The details of the purchase agreement are negotiable, but sellers typically prefer an agreement that’s as clean as possible. In other words, it may be best not to ask for seller concessions or for furniture to be included in the deal.

Once your offer is accepted, you’ll also typically make an earnest money deposit. The amount of earnest money you’ll put forward is a small percentage of the purchase price, and it’s designed to show the seller you’re serious about moving forward with the purchase.

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6. Finalize The Loan

After you’ve entered into a legal commitment via your purchase agreement, you’re ready to formally apply for your mortgage. If you haven’t already, you’ll need to consider the types of mortgages you qualify for with your credit score, compare their respective interest rates and down payment requirements, settle on a down payment amount and choose a loan term length.

Later, you may have to gather some final documentation before you’re clear to close. You may have already completed a good portion of your application paperwork during preapproval, but it’s likely your mortgage lender will need some additional information to underwrite your loan. Loan officers will often ask for any information you haven’t provided on your debts, assets, credit and income.

Once you finish your application, your lender will provide you with a Loan Estimate. This doesn’t mean your loan is approved, but it does lay out the details of your mortgage, such as the total loan amount and the estimated value of the property you want to buy.

7. Wait For Underwriting

Once your offer is accepted, the purchase agreement is sent back to your lender, who will review the agreement to make sure everything is in order. Once this happens, your loan goes through mortgage underwriting.

During the underwriting process, an underwriter will verify your income, assets and employment status. They’ll also compare everything to the information on your credit report and verify that your DTI remains the same. Lenders always pull a potential borrower’s credit at the beginning of the process, but a preapproval lasts for just 90 days.

If you’ve been house hunting for a while, the lender may need to pull your credit again. So, try not to add debt during the home buying process. Taking out a loan that’s not your mortgage while shopping for a house could put your home financing in jeopardy.

Mortgage Rate Locks

Before closing on the house, you and your lender will typically decide whether to lock your interest rate. Because mortgage rates are almost constantly fluctuating, a mortgage rate lock ensures that your interest rate stays the same through your closing date (when it’s permanently locked in if you have a fixed-rate mortgage), or 30 – 60 days after the lock goes into effect.

During this period of time, your lender may ask for updated or additional documentation if needed.

8. Get A Home Appraisal

Most often, a mortgage lender will require a home appraisal during the underwriting process. The appraisal protects you and your lender by verifying the home is worth the price you’ve agreed to pay the seller.

During an appraisal, a professional evaluates the condition of your home and its various features while also considering comparable properties nearby. For example, if the property you’re buying is a two-bedroom ranch with a recently renovated primary bath, the appraiser will look for properties in the area that are as similar as possible. The appraiser compares recent sales data and estimates a dollar value for the house.

If the appraisal comes in lower than your offer, you have three options:

  1. You can try to negotiate a lower purchase price with the seller.
  2. You can cover the difference between the appraisal value and the asking price at closing.
  3. You can walk away from the deal without losing anything if you have an appraisal clause in your purchase agreement.

9. Prepare To Close

When the underwriting process is complete, it’s time for the final step – closing on your new home. On closing day, you should bring photo IDs and a copy of your Closing Disclosure. Also, upon receiving instructions, you’ll send the closing attorney – likely via wire transfer – your down payment and the money to cover all your closing costs. Once you arrive at the attorney’s office, you’ll sign the mortgage papers, take possession of the deed and receive copies of your closing documentation.

You can expect to pay about 3% – 6% of the total mortgage amount in closing costs, which may include appraisal fees, discount points, loan origination fees, inspection fees and more. Closing costs can make up a large portion of your upfront costs on a mortgage loan, so be sure to account for them during your financial planning.

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Mortgage Loan Process FAQs

Now that you have a better understanding of the home loan process, let’s take a look at some frequently asked questions about this topic.

What is lender processing?

Lender processing is performed by your loan officer, sometimes called a Home Loan Expert. They collect and process paperwork and communicate with you and the underwriter to expedite the mortgage process.

Is there a chance of getting denied after preapproval?

Yes, your final mortgage application can be denied after preapproval. This can happen during underwriting when your lender carefully scrutinizes all of your financial details. It can also happen if there is an issue with the property. To give yourself the best chance of approval, always be upfront about any past financial missteps and avoid taking on new debt while in the process of buying a home.

How long does mortgage preapproval take?

Most people can expect to be preapproved within 1 or 2 business days. Also sometimes called Verified Approval, this process typically includes a hard credit pull and you sharing income and asset documentation from your bank.

How long does it take to get a mortgage?

It generally takes 30 – 60 days to complete the mortgage loan process, from the day you sign the purchase agreement to the day you sign the closing papers on the home.

You can help speed up the mortgage process by turning in all your documentation on time, at your lender’s request. This is one aspect of the mortgage process over which you have direct control. So, stay organized and provide any requested information as quickly as possible.

The Bottom Line: Take Steps To Simplify The Home Loan Application Process

Once you reach your closing day, you’re rewarded with a new home and the official status of homeowner. Those who are familiar with each step of the mortgage loan process are best positioned for a smooth home buying journey.

Ready to begin your pursuit of a new home? today.

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