How To Get a Home Mortgage: Guide for First Time Home Buyers

The mortgage process can be confusing for first time homebuyers. You can get help from friends, family, or mortgage lenders, and some of it you may learn through your own research. Learning how to find the right mortgage for your needs can make the difference between buying more than you can afford and getting a home that suits your budget.

How To Get a Mortgage

1. Clean Up Your Credit
2. Determine Your Budget
3. Research Interest Rates
4. Consider Types of Mortgages
5. Find a Mortgage Lender
6. Gather Necessary Documents
7. Consider Getting a Co-Signer
8. Get Pre-Approved
9. Start Looking for a Home
10. Submit a Mortgage Application
11. Finalize the Mortgage
12. Complete the Closing Process

Even the best mortgage lenders require buyers to put a down payment on their home to reduce the lender’s risk. Others require private mortgage insurance to protect the lender in the case of you not being able to afford your payments. These and other variables can increase the amount you pay for your mortgage monthly.

Knowing how to get a mortgage is vital for any first time home buyer. From researching mortgages to sending in a mortgage application, you’ll encounter several steps in the process. Your credit score, credit history, personal loan status, income, and other factors play a role in securing the mortgage for your first home.

Because mortgages cover such a big investment – your new home – they come with a lot of red tape. A lender will likely have you walk through several steps before it approves your mortgage loan, simply to protect the investment it’s making to you through your mortgage. The following steps will guide you in understanding how to get a mortgage.

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1. Clean Up Your Credit

Your credit is one of the most important pieces of your financial profile that a mortgage lender considers when determining if you qualify for a home loan. Your lender looks at your credit score and credit history. A credit history contains information about your on-time payments, types of debt, amounts of debt, and how many credit inquiries you’ve had within the past couple of years. Overall, this information tells different lenders how reliable you are when it comes to managing and paying your debt. 

Consider getting your credit in the best possible shape before applying for a home loan. Here are a few ways to do that:

• Have different types of debt: Lenders want to see different types of debt, such as an auto loan, credit cards, and a line of credit. On-time payments with a diverse debt profile prove to lenders that you understand how to manage your money.
• Be sure to have a credit history: Your mortgage lender will want to see that you’ve had credit for at least a few years. Avoid closing any credit or loan accounts for at least a few months before you begin applying for mortgages.
• Pay off as much debt as you can: Credit utilization is the amount of debt you have compared to the amount of credit you’re allowed. For instance, carrying a $1,000 balance on a $4,000 credit line gives you a 25% credit utilization. A mortgage lender usually likes to see this number under 40% for all of your credit, but closer to 25% is even better.
• Don’t open any new lines of credit: Refrain from applying for other loans or credit cards in the year before you plan to apply for a mortgage, if possible. Credit inquiries stay on your credit report for two years, and it’s best to have the number as low as possible to show that you’re not actively looking for more credit.

2. Determine Your Budget

A healthy credit report can help you become eligible for a lower interest rate and easier preapproval process. Still, the home loan you can reasonably afford ultimately relies on your income and personal budget. 

When home buying, it’s crucial to consider not just your monthly mortgage payment, but also your property taxes, homeowners insurance premium, immediate repairs, and other factors that account for your buying expenses. These costs tack extra cash onto your monthly mortgage payment and can significantly eat into your budget.

Another cost to consider is a down payment, which most mortgage lenders require. Some loans, like those from the Federal Housing Administration (FHA), have lower down payment requirements, but you’ll still need money to put down on your home. Buying a home also comes with closing costs, which you’ll pay when you’re ready to sign your documents.

Many financial experts suggest that your mortgage should be no more than 28% of your income. However, it’s best to include mortgage insurance, property taxes, and your homeowners insurance premium in that calculation to determine the full cost of your house each month. If you’re not sure how to create your budget based on your financial situation, you could enlist the help of a financial advisor.

3. Research Interest Rates

The monthly payment for your mortgage depends on your interest rate. A lower interest rate generally yields a smaller payment, and you’ll pay less in interest over time. However, lenders reserve the best interest rates for their most creditworthy applicants. Still, you can shop around with lenders and mortgage products to find an interest rate you’re comfortable with. 

The type of mortgage you choose can influence your interest rate, too. For instance, a fixed mortgage rate stays the same throughout the entirety of the loan, but an adjustable rate can change over time. Adjustable-rate mortgages generally start with lower interest rates than fixed-rate mortgages, but they can be a bit more unpredictable as time passes. Similarly, a 30-year loan gives you more time to pay with lower monthly payments, but you’ll usually have a higher interest rate than you would with a 10-year or 15-year loan.

Some mortgage programs also affect mortgage rates. For example, FHA and VA loans could offer lower interest rates than mortgages from traditional lenders.

Use free online calculators or ask lenders for a loan amortization schedule to determine which interest rates align best with your short-term and long-term financial goals.

4. Consider Types of Mortgages

Learning how to get a mortgage requires you to understand the differences between the types of mortgages for which you might qualify. Let’s look at a few of the most common mortgages:

• Conventional loan: These are loans from traditional lenders. They come in various forms and interest rates. Homebuyers who don’t qualify for government-backed loans or other mortgage assistance may choose a traditional loan. Lenders may require at least a 20% down payment or private mortgage insurance.
• Government-backed loan: USDA and FHA loans are examples of government-backed mortgages. With these programs, a government agency secures the loan, lowering a lender’s risk. FHA loans are best for people with fair or good credit, while USDA loans help low-income borrowers afford homes in eligible areas. Lower down payments is a perk that comes with these mortgages.
• VA loan: A VA loan is a type of government loan that comes from the United States Department of Veterans Affairs. VA loans assist active-duty servicemembers and veterans with buying affordable housing. They feature lower interest rates and no down payment.
• Jumbo loan: Jumbo loans are generally for high-cost homes. Borrowers may need very good to excellent credit scores and at least a 10% down payment to qualify. 

Lenders may also have unique mortgage products, so be sure to explore your options to find the right mortgage for you.

5. Find a Mortgage Lender

Next, spend time researching the best mortgage lender. Different lenders may offer different types of loans, and some have better interest rates depending on your credit score. The mortgage process can vary a bit between lenders, too. 

Reading online reviews of each lender can give you some insight into other borrowers’ experiences. You might also call each lender to speak with a representative who can answer your questions about the lender’s requirements. However, the easiest place to start is usually the lender’s website, which gives a basic overview of its mortgage requirements, options, and what you can expect when you choose that lender.

While researching, specifically look for:

• What mortgage products the lender has available
• Whether the lender works with government mortgage agencies, like USDA or FHA
• The lender’s minimum credit score requirement
• Minimum down payment requirement
• Ease of preapproval
• Any extra fees you should know about

Consider looking at different types of mortgage lenders, like traditional banks, credit unions, or mortgage companies. Sometimes, the banks or credit unions you already have online banking accounts with can offer you the best deals. Mortgage brokers can also come in handy, as they’ll work with you to find the right lender and mortgage product for your needs for a small percentage of your loan’s amount.

6. Gather Necessary Documents

Once you find a lender and mortgage option you like, you’ll need to give the lender several documents to verify your identity, income, assets, and other pertinent information. The following are the most common document types you’ll need for your lender.

Identification Documentation

First, your lender will start by asking you to provide documents that prove your identity, such as your driver’s license or a photo ID and your social security number. The lender will use your social security number to pull your credit report to get your credit history and score. You may need to give verbal or written consent for the lender to pull your credit report. You may also need to provide proof of your address.

Financial Documentation

Most of the documents your lender requests will refer to your finances. To start, you’ll need proof of your income, such as pay stubs from a job or tax returns or financial statements from a business or self-employment.

Your lender may also ask for bank statements to show how much money you generally have in your checking or savings accounts. You’ll also need to let the lender know what debts you have, such as student loans, auto loans, or credit card payments, and you’ll need statements for each account.

Proof of assets is also necessary for a lender to determine your overall financial value. Show proof of retirement accounts, investments, rental properties, life insurance, etc. 

If someone is offering to send you a monetary gift for your down payment, you should have the details of the gift in writing to show your lender. 

7. Consider Getting a Co-Signer

After your lender reviews your documents, it can better determine whether you might need some help with your loan. A co-signer is necessary for some individuals to reach mortgage approval. For instance, if you have bad credit or not quite enough qualifying income to meet the lender’s requirements, it might suggest a co-signer.

When approving you for a loan, your lender considers you and your co-signer’s income and creditworthiness. So, a person with an excellent credit score and higher income can help you be a more worthy applicant in the eyes of a lender.

A co-signer can be any person you trust to be on the loan with you, such as a parent, significant other, or close friend. The co-signer becomes responsible for the loan, too, in the event that you stop making a mortgage payment each month. Therefore, it’s crucial to choose someone who trusts you, too. 

8. Get Pre-Approved

Most mortgage lenders offer a mortgage preapproval to help you as you search for homes. A mortgage preapproval is an estimated amount that you may qualify for to purchase your home. You can use it to understand how much home you can afford, allowing you to narrow your search. 

A mortgage preapproval is a handy baby step in the mortgage process. You won’t have to go through the entire process of qualifying for a mortgage, which can take more time and require lots of documents. Still, a preapproval can give you a loan estimate that helps you budget for your new home.

Your lender will usually suggest a preapproval before you move on to the actual mortgage process. Once you choose a home, the lender can begin processing your documents, information about the home, and other factors for getting a mortgage.

9. Start Looking for a Home

With your mortgage preapproval in hand, it’s time to start looking for a home. Your preapproval tells sellers that you’re ready to buy and have a potential mortgage in the works, making your offers more appealing than those from buyers without a preapproval.

Consider using a real estate agent to search for homes. Not all homes are listed publicly, so your agent could help you find private listings that fit your budget, needs, and preferences. 

It’s a good idea to ask your real estate agent to find homes below the top end of your preapproval budget. This way, if you end up qualifying for a lower mortgage than your preapproval states, you won’t have to turn down the home you want. 

When you’ve found your perfect home, submit an offer. Your agent will communicate with the seller or their agent to negotiate the offer. Once you get the green light, you can head back to your lender to let them know.

10. Submit a Mortgage Application

Your lender will now move you through the actual mortgage process by having you submit an application. This application will be more detailed than your preapproval application. Mortgage lenders may run another credit check to ensure that nothing has changed since you received your preapproval, as there can sometimes be a couple of months in between each credit pull.

After submitting your application, prepare to be in regular communication with your lender. They will likely need more documents as proof of your income or assets or to call you to clear up any confusion with your information. The quicker you respond, the quicker your mortgage lender can move on with your application.

11. Finalize the Mortgage

Once your lender approves your documents, your mortgage moves into the underwriting process. Underwriting refers to the analysis of your documents, creditworthiness, and other factors that determine how much risk a lender has if it covers your loan. This part can be scary and lengthy, but lenders must know whether they’re making a smart financial move by loaning you money for your home.

Again, during this time, be available to speak with your lender to answer any questions they have or provide additional documents, if necessary. Be careful about how you use your bank or credit accounts during this time, as underwriters can check on credit card accounts and bank statements to see if you’re making any large purchases.

After the underwriting process is complete, your lender will officially approve or deny your loan. At this time, your lender may also work with you to set up an appointment to close on your home.

12. Complete the Closing Process

Congratulations – it’s time to close on your home! Whether you have a VA loan, FHA loan, or a conventional loan, you must go through the closing process. This is when you’ll sign all of your closing documents, pay closing costs, and get the keys to your new home.

Your lender will likely set you up with an appointment through a title agency, which conducts the closing process. The title agent prepares your documents and walks you through each one you need to read and sign. If desired, you can hire an attorney to assist you at the appointment and help you make sense of any legalese or confusing points in your documents. Prepare to have a couple of hours set aside for this appointment, as they can typically take 1-2 hours. 

Prior to your appointment, you should have a homeowners insurance policy in place. Some title agencies may allow you to select a company and help you finalize your policy during the appointment, but you won’t have as much wiggle room to do your own research this way.

How Long Does Mortgage Underwriting Take?

From the time you send a mortgage application to the date you close on your home, your loan goes through the underwriting process. Loan underwriting is when an underwriter reviews your information and documents to determine the lender’s risk for lending to you. This can take, on average, 30 to 45 days. However, it could be as little as a couple of weeks to as long as a couple of months. Here are a few factors that could influence the underwriting process:

• Your documents: If you’re missing any documents that the underwriter needs to process your loan fully, underwriting can take longer. Make yourself as available as possible to communicate with your lender and provide the necessary documentation.
• Your financial situation: An underwriter will notice if your banking or credit accounts have had a lot of activity recently, and it could delay the underwriting process or deny your loan altogether.
• Changes in your situation: Have you changed jobs or closed a business recently? If so, the underwriter may not have enough reliable income information to move your loan to the next step.
• Issues with the home: When a property appraises lower than the loan you’ve asked for, it could affect underwriting. Similarly, an inspection that shows significant issues with the home typically boosts a lender’s risk and could delay or stop underwriting. A foreclosure can also take longer to underwrite because it requires the underwriter to review more paperwork.

How To Get a Mortgage

We’ve included several important steps for how to get a mortgage as a first-time homebuyer. However, it’s important to remember that every homebuyer’s situation is unique. You might find the process to be more simple or complicated than we’ve outlined here, depending on your situation.

These steps are generally what you can expect from the mortgage process. Before you begin searching for lenders, consider getting your credit and finances in order, and spend time working on your budget. Also, take time to learn your rights by browsing through the Consumer Financial Protection Bureau’s guides for homebuyers.