Overview
With most lenders nowadays, you can apply for a mortgage online from the comfort of your own home.
But getting a mortgage isn’t just filling out some bits of information and hitting “submit.” If you want to ensure you get the best rate, lender, and loan possible, the process takes a little more prep and elbow grease.
Are you planning to apply for a mortgage or HELOC soon? Here’s how to go about the process right.
Mortgage vs. HELOC
Mortgages are loans you use to finance a home purchase. You make a down payment (almost like a deposit on the house), and then a lender loans you the money for the rest of the home’s price. You then repay the money, plus interest, over an extended period of time — most commonly, 30 years.
HELOCs, or home equity lines of credit, are a type of second mortgage. You take them out in addition to your main mortgage, so they add a second monthly payment to your household. With HELOCs, you borrow from your home equity (your home’s value, minus your main mortgage balance). These funds are issued as a line of credit you can withdraw from over time, much like a credit card. Homeowners often use them to pay for repairs/renovations or to consolidate debt.
Both mortgages and HELOCs use your home as collateral, so if you fail to make payments, the lender can foreclose on your house.
Step 1: Prepare Your Finances
The first step is to get your finances ready. You’ll need money saved up for the down payment and closing costs, and you’ll want to make sure your credit is in a good place, too. The better your credit score is, the better your interest rate will be (and the easier it will be to get approved for a loan).
You should also use a mortgage calculator to determine what you can comfortably afford each month. This will help you set an appropriate price range for your home search.
Step 2: Determine What Loan Program You’ll Use
Next, it’s time to think about what type of loan you’ll use. There are many types to choose from, and the right one depends on your qualifications, where you’re buying a home, your income, and other details.
Common options include:
FHA loans: These are good for first-time buyers. They require a minimum 3.5% down payment and a 500 credit score.
VA loans: These are loans for military members and veterans. They require no down payment.
USDA loans: These are an option if you’re buying a home in a rural area. You’ll need to fall under a certain income threshold, too. They also require no down payment.
Conventional loans: These are the most popular type of mortgage. You’ll usually need at least a 620 credit score and 3% down.
If you’re already a homeowner, a second mortgage may be what you’re looking for. These include home equity loans and home equity lines of credit (HELOCs), which let you borrow from your home’s equity. Many homeowners use these to pay for repairs or renovations or to consolidate high-interest debts like credit cards.
Step 3: Make a Shortlist of Lenders
Start thinking about the companies you may want to apply to. You can get recommendations from friends, family members, colleagues, or your real estate agent, and look at online reviews and ratings, too.
Make sure the lenders you shortlist actually offer the loan program you’re interested in (only certain lenders are approved to offer VA and USDA loans, for example) and that they serve your geographic area.
Step 4: Gather Your Documents
When you apply for a mortgage, you’re required to submit a variety of financial documents. These give your lender an idea of how much money you have coming in, what you have saved up for closing costs and your down payment, and what you can comfortably afford as far as a mortgage payment goes.
To make the application process easier, go ahead and pull this documentation ahead of applying. You’ll need:
The last two years’ tax returns
W-2s for the last two years
Your two most recent pay stubs
Your two most recent bank statements (including any for savings accounts, investment accounts, retirement accounts, etc.)
Documentation for any additional income you receive, such as child support, alimony, disability, bonuses, commissions, or Social Security
You will also need to provide a copy of your driver’s license or state ID and your Social Security card.
Step 5: Apply with Several Companies
Now, it’s time to fill out your loan applications. You’ll want to apply with several lenders, as rates and fees can vary quite a bit from one company to the next.
According to Freddie Mac, getting at least four mortgage quotes can save you over $1,200 annually in interest, so aim to apply with four companies at a minimum. Make sure to file your applications within the same two-week period. This will ensure the applications only count as one hard credit inquiry, minimizing their impact on your credit score.
Step 6: Compare Your Options
Once you’ve applied with a lender, they’ll give you a loan estimate form that will detail all the terms and fees of their loan offer, including the length of the loan, the interest rate, and the various closing costs and taxes you will owe. You can use this form to compare companies and determine which one is offering you the best deal.
Don’t be afraid to negotiate, either. If one lender is offering a lower rate, ask the others if they can beat that offer. If they really want your business, they may be able to make you a better deal.
Step 7: Lock Your Interest Rate
When you’ve determined which lender has the best loan offer, you’ll need to lock your rate with them. This guarantees you the interest rate you were quoted for a certain period of time — usually 30 to 90 days, depending on the lender. You can then use this time to shop for your home without worrying about changes in the market.
Step 8: Submit Your Contract
Once you’ve found a home and had an offer accepted, you’ll need to provide your lender with the signed sales contract. This will move your loan into underwriting, which is when the lender will verify all your financial information and ensure you meet the loan requirements once more.
Step 9: Have Your Home Appraised
The lender will order an appraisal of your home to verify its market value and ensure it’s worth what you’ve offered to pay for it. If it’s not, you may need to renegotiate with the seller or come up with additional cash. Your lender won’t loan you more money than the home is worth.
However, if the appraisal confirms the home is worth what you’re borrowing for it, your loan will move forward, and you’ll be scheduled for a closing date.
Step 10: Attend Your Closing Appointment
Finally, you’ll attend your closing appointment. Some lenders offer digital closings, while others may require you to go to their office, an attorney’s office, or the office of your title company for closing.
Wherever it’s done, you’ll need to sign your loan documents and transfer the money for your down payment and closing costs. Once that’s finished, you’ll officially have a mortgage.
Get Help Along the Way
Getting a mortgage can feel complicated, but you don’t have to go it alone.
If you’re worried about the mortgage application process, talk to your real estate agent or a mortgage broker. They can help guide you through your application and ensure you stay on track.
by your friends at The Daily Navigator
