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Mortgage Loan Process Explained in 11 Steps

By Alene Laney · January 30, 2023 · 7 minute read

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Mortgage Loan Process Explained in 11 Steps

There are few things more exciting than buying a home. But before most house hunters can do that, they need to qualify for a mortgage. The mortgage application process is one of those things that may be more complicated to explain than to experience. Still, learning about the steps in advance can help applicants feel better prepared and avoid any unpleasant surprises.

Here’s what you need to know about the mortgage process, including moves you can make that may expedite your approval.

Step-by-Step Guide to the Mortgage Loan Process

1. Estimate Your Budget

Below are the main cost considerations when determining your budget.

Down Payment

When determining how much you’ll put down, keep in mind that the lower your down payment is, the higher your monthly mortgage bill will be — and the more interest you’ll pay over the life of the loan.

Your credit score can be a factor in your down payment options. FHA loans with a low 3.5% down payment require a score of 580. If you can manage a 10% down payment, however, your score can be as low as 500.

A down payment greater than 20% can help you avoid expensive mortgage insurance.

Closing Costs

Many costs come up during the mortgage loan process. Some can be rolled into the loan; the rest make up your closing costs. They can include a home inspection fee, appraisal fee, prepaid property taxes, prepaid homeowners insurance, title insurance, prepaid interest, origination fee, discount points, and FHA, USDA, or VA fees if you choose one of those loans.

Plan on paying between 2% and 5% of the loan principal in closing costs, and set money aside to cover them.

Affordability Rules of Thumb

Certain budgeting guidelines can help you determine what kind of monthly mortgage payment you can afford. You’ll also want to figure in homeowners insurance, any homeowners association (HOA) fees, and possibly mortgage insurance, or PMI.

•   The 28% Rule. This rule advises spending no more than 28% of your gross monthly income on a mortgage payment. If your income is $10,000 a month, for example, your payment should be $2,800 or less.

•   The 35% / 45% Guideline. Some lenders prefer that your total monthly debt be no more than 35% of your pre-tax income or 45% of your after-tax income. This is also known as your debt-to-income ratio.

2. Choose a Mortgage Type and Term

There are many different mortgage types, and choosing one will depend on your income, down payment, location, financial approach, and lifestyle.

Some choices you’ll need to make are:

•   A fixed-rate or adjustable-rate mortgage

•   A conventional or government-insured loan (FHA, USDA, or VA loan)

•   A conforming or nonconforming loan (such as a jumbo loan)

•   If you should opt for an interest-only mortgage

•   Your repayment term: typically 15, 20, or 30 years

A good lender will walk you through your options, whether it’s a HUD home requiring an FHA mortgage or a high-priced home with a jumbo loan.

3. Choose Your Lender

Your lender will have an impact on your financial life for as long as you’re responsible for that mortgage. Finding one who not only offers a great rate but can also help you navigate the mortgage process is one of the smartest things you can do.

These questions to ask a lender can help you narrow down your list.

4. Get Pre-Approved

In the mortgage pre-approval process, homebuyers complete a full mortgage application. The lender will perform a hard credit inquiry and issue a letter confirming your ability to borrow a certain amount of money.

In general, the better your credit score, the better the mortgage rate you’ll be approved for. If your score is above 740, you’ll qualify for the best rates.

A pre-approval letter, usually good for 60 to 90 days, can improve your odds of winning over a seller in a bidding war. In competitive markets, having a pre-approval letter may even be a requirement.

Recommended: What’s the Difference Between a Hard and Soft Credit Inquiry?

5. Find a Property and Make an Offer

Your real estate agent will guide you through the process of finding a property and making an offer. The offer is typically written by the buyer’s agent on a standardized form.

Be sure you only make offers on properties that fall under the amount you’ve been pre-approved for. Otherwise, the lender will need to re-process your full application again. If you don’t qualify for the new, larger amount, you may not be able to secure any loan on the property.

If your offer is accepted, you’ll send the signed paperwork to your lender.

6. Apply for a Mortgage

Lenders are required to do a second credit check before final loan approval and will likely ask for further documentation. If you’ve opened a new account, changed jobs, or made a major purchase since pre-approval, those actions will have to be vetted.

Responding quickly to your lender’s requests for documentation can help keep your application on track.

7. What Mortgage Lenders Look At

Mortgage lenders value creditworthy borrowers. Those with higher incomes, low debt, a healthy amount in savings, and high credit scores are ideal borrowers.

Lenders also take a deep dive into the details on your credit reports, including your payment history, recent applications, credit utilization, major derogatory reports, disputes, and authorized users.

Income, Savings, Assets

A lender’s primary job is to verify that you have enough income, savings, and assets to afford the mortgage you’re applying for. When you submit your mortgage application, you’ll submit bank statements, tax returns, W-2s, retirement account statements, and other documents that show you’ll be able to afford the mortgage.

If you received help from a family member to fund your down payment, you’ll need to provide a gift letter to the lender. This is to verify the source and intention of the funds given to you.

Employment

Mortgage lenders prefer borrowers who have stable, predictable incomes. A steady employment history signals to the lender that you have regular income coming in to make the monthly payments of a mortgage. That’s why it’s easier to get approval as a W-2 employee than as a self-employed worker.

In general, lenders like to see two years of employment in a loan application. Self-employed individuals will submit two years of tax returns.

Credit Score

Buyers often wonder what credit score is needed to buy a house. A homebuyer usually needs a credit score of at least 620 to get a conventional mortgage (one not insured by a government agency).

8. Be Patient and Avoid New Debt

The average time between submitting a mortgage application and closing is 52 days. During this period, it’s wise to observe a self-imposed “credit freeze.” That is, don’t run up your credit cards beyond what you usually spend each month. Put off major purchases. Don’t apply for new credit cards, HELOCs, auto loans, or other new debt. And, of course, make sure to pay all your bills on time.

If there’s any significant change in your credit history, your closing may be delayed or even derailed. Should something major come up (like an expensive medical emergency), call your lender to let them know.

It can be tough feeling like your life is on hold while you’re waiting for your mortgage application to be processed. Try to be patient and just let the process play out. Now is a good time to reach out to friends and family who have been through the mortgage loan process before and commiserate. Consider this your orientation into the homeownership club.

9. Get an Appraisal and Home Inspection

Once your lender has received your contract and full application, they will order an appraisal. This is an independent property evaluation of a home’s value. The appraisal will describe the home and what makes it valuable. Factors that affect the appraisal value include the location, condition, amenities and features, and market conditions in the area.

A lender requires a home appraisal to ensure that it isn’t lending more than the property is worth. If the appraisal comes in too low, the lender won’t lend extra money to cover the gap. Buyers will need to cover the difference with their own money or renegotiate the price with the seller to match the appraisal.

At this point, you’ll want to run through your home inspection checklist. Typically, buyers will hire an inspector to thoroughly check the property inside and out for undisclosed problems. If expensive issues are unearthed, the buyers may negotiate for a price reduction or back out of the deal without penalty.

10. Mortgage Underwriting and Processing

The underwriting process begins after you complete your mortgage application and ends after all the documentation has been completed. The underwriter examines the borrower’s financials, as well as the appraisal, title search, and proof of homeowners insurance.

Once all documentation has been reviewed and verified, the underwriter will recommend approval, denial, or pending. A pending decision is given when information is incomplete. You may still be able to get the loan by providing the documentation asked for.

After underwriting approval with a “clear to close,” you’re set to close on your loan.

11. Close on Your New Home

Closing day is when all parties sign the final documents, and ownership is legally transferred from the sellers. In the days prior to your close, the lender should provide a final list of closing costs. The buyer can pay them by wire transfer a day or two before, or by cashier’s check or certified check that day.

In the past, buyers and sellers, their agents, and lawyers would gather in the same room to sign the paperwork. In recent years, remote online closings have become more common.

SoFi Mortgage Rates

If you’re ready to launch the mortgage loan process, include SoFi in your hunt for a home mortgage loan.

Why SoFi? You’ll find competitive fixed rates on mortgages. Qualified first-time buyers can put just 3% down. And you can get access to a range of member benefits at no cost.

Getting pre-qualified is quick and easy.


Photo credit: iStock/MicroStockHub

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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
This article is not intended to be legal advice. Please consult an attorney for advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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