Housing Finances How to Get a Mortgage & Best Mortgage Options Read the Article Open Share Drawer Share this:Click to share on Twitter (Opens in new window)Click to share on Facebook (Opens in new window)Click to share on Tumblr (Opens in new window)Click to share on Pinterest (Opens in new window)Click to share on LinkedIn (Opens in new window) Written by Mint Modified Apr 28, 2021 16 min read Advertising Disclosure The views expressed on this blog are those of the bloggers, and not necessarily those of Intuit. Third-party blogger may have received compensation for their time and services. Click here to read full disclosure on third-party bloggers. This blog does not provide legal, financial, accounting or tax advice. The content on this blog is "as is" and carries no warranties. Intuit does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog. After 20 days, comments are closed on posts. Intuit may, but has no obligation to, monitor comments. Comments that include profanity or abusive language will not be posted. Click here to read full Terms of Service. Save more, spend smarter, and make your money go further Sign up for Free When you’re buying a home, the process can seem intimidating. First, there’s finding a home you’re ready to settle down in: you have to research your must-haves, tour homes, and figure out just how much you want to spend. Unless you have the full cash amount in hand, it’s likely that you’ll need know how to get a mortgage. Unfortunately, this type of loan can be a bit complex to grasp at first glance. Unraveling the fees, requirements, and terms related to mortgages is a puzzle worth solving, however. With the right knowledge, you can make an informed decision about your mortgage options and get one step closer to being a homeowner. Our guideline below will help clear up some common questions you may have regarding how to get a mortgage loan. What is a Mortgage? To catch you up on all the terminology, let’s start with the most basic term first: mortgage. A mortgage is a loan from a bank or a specific mortgage lender that assists you in buying a home. This loan is secured by the home you are purchasing. Mortgages are generally paid every month and are made up of 4 different parts: Principal: The amount of money you borrow and must pay back to the lender. Interest: What the lender is charging you for providing the loan. Taxes and insurance: The property tax requirements on your property, which can vary based on where you live. Sometimes, you pay a standardized amount of taxes and homeowner’s insurance each month that goes into an escrow account. At the end of the year or billing cycle, the mortgage lender pays the tax and insurance amounts due on your behalf from the escrow account. Private Mortgage Insurance: This protects the lender if payments fall through (only applicable in some loan situations, like if you pay less than a 20% down payment). Other factors: Your payment may also include additional factors, including HOA fees. Do I Qualify for a Mortgage Loan? You’re ready to buy a home and you need to apply for a mortgage, it’s an exciting – sometimes nerve-wracking – time. Getting a mortgage involves delving into all of your financial details like debts, income, and assets. What steps should you take to make sure you’re ticking off all the boxes required? Keep reading or jump to the appropriate section to get the specific answers you need about how to get a mortgage. Check Your Credit Score How do I raise my credit score? What credit score do I need to buy a house? Can I buy a house with no credit? Know Your Debt-to-Income Ratio Figure Out Your Down Payment Can I buy a house with no money down? Get Pre-Qualified Get Pre-Approval Choose the Right Mortgage Option Conventional Loans FHA and other Government-backed Loans Fixed-Rate Mortgage Adjustable-Rate Mortgage Find the Best Lender for You Turn in Your Application Wait Out the Underwriting Process Closing on Your New Home 1. Check Your Credit Health and History If you saunter into a bank, they’re not just going to hand over a mortgage, especially in our post-recession economic landscape. You have to prove your financial responsibility before you get approved. One critical part of getting a mortgage is knowing your credit score and making sure it’s high enough to get a loan in the first place. The easiest way to check your credit report is to get a free copy from one of the three national credit bureaus. You can get a free report from each once every year. There are several different credit scores, all with different ranges. The higher your score, the more likely you are to get a mortgage with favorable rates. You’ll need a credit score of at least 580 to apply for a Federal Housing Administration (FHA) loan, but you may find you need a higher score to apply for a mortgage from another lender. These minimum score requirements can change, however, and the general rule is the higher your credit score, the better your chances of getting a loan. How do I raise my credit score? If you know you’re going to be buying a house and realize that your credit could use a boost, you can help raise your score in a variety of ways. Use less of your available credit: Using a smaller percentage of your available credit is preferred with the ideal amount at 30% or lower. Pay down your balances: Make sure huge amounts of debt aren’t sitting month-to-month on your credit cards. Also, pay attention to even small balances sitting on multiple lines of credit. Pay bills on time: This is self-explanatory but it’s one of the main parts of your credit score. Don’t be surprised to see paid-off debts: If you have a debt that you paid off in full but it shows up in your credit report, don’t try to call the credit agency to dispute its existence. As long as this information is accurate, having it on your credit report may help show lenders that you were a reliable borrower and that you made regular payments. Finally paid off your car? That’s simply an “A” on your credit report card. Avoid applying for other lines of credit or loans: Trying to get another credit card causes a dip in your credit that can last a calendar year. So only keep the credit you have. Keep older bank accounts: They’re valuable parts of your financial history. Pro-tip: That 1975 library debt you never paid could actually come back to haunt you. If the library has your information and calls a debt collection agency, it may ding your credit. What’s a good credit score? How are the scores rated from worst to best? Depending on the score model your lender is using, rates may look a bit different. For example, FICO scores range from 300 to 850, and are categorized as follows: Excellent: 800 and higher Very Good: 740 – 799 Good: 670 – 739 Fair: 580 – 669 Very Poor: 579 or lower VantageScore ratings also follow a 300 to 850 scale, but they are categorized differently: Excellent: 750 and higher Good: 700-749 Fair: 650-699 Poor: 649 and lower Can I buy a house with no credit? You need a financial history to buy a house but if you don’t have credit, sometimes alternative sources of credit like regular payment of utility bills can be used. However, your best bet is planning ahead and that means you need to start building your credit as soon as you decide you want to buy a house. This could mean considering things like getting a credit card, using it appropriately, and making sure to pay off the entire balance every month. Lenders want to see a consistent credit history and that means at least 12 months of regular payments. Having a limited credit history doesn’t necessarily mean you won’t get approved for a loan, but you might have to shop around to find a particular lender that will work out a deal with you. 2. Be Familiar with Your Debt-to-Income Ratio This is a crucial factor for mortgage lenders who are looking into your background and credit history. Your debt-to-income ratio (DTI) is the amount of debt you have in comparison to how much you make each month. This gives the lender an idea if you will be able to reasonably repay your debts every month and make mortgage payments. The smaller you debt-to-income ratio is, the better shape you’ll be in for a loan. An ideal DTI is less than 36%. Depending on the lender, sometimes they will accept DTIs as high as 43% percent. To calculate debt-to-income ratio, combine all your debts you pay per month and divide them by your gross income (so, before taxes and deductions are taken out). For example, let’s say you will have a mortgage of $1,200 a month and you pay another $300 in student loans and $120 in auto loans. Your total monthly debt is $1,620. If your gross income per month is $7,000, then your DTI would be 23% because $1,620 is about 23% of $7,000. The higher your DTI, the riskier you appear to a lender because statistically, those with higher DTIs are the borrowers who struggle with making mortgage payments. Keep in mind, each lender is different and banks can make decisions on a case-by-case basis. However, as a general guideline, you’ll want a smaller DTI for the best mortgage rates. 3. Calculate Your Down Payment Amount The best-case-scenario for down payments is being able to save up quite a bit for a larger initial payment. A 20% down payment or more is the sweet spot for mortgage approval. Your down payment is the start of your equity in your property aka your stake in property ownership so a bigger down payment means that you’ll have more equity sooner. This could help protect you if the market takes a turn for the worse. Lenders like to see at least a 20% down payment because it lowers your overall risk as a borrower. Some benefits for you, the borrower, include less fees upfront and over time, a smaller monthly mortgage payment, and as we said before, more equity sooner. Unfortunately, your down payment is just one of the many financial costs incurred at the onset of buying a house. You’ll also have to deal with closing costs which we will touch on later. Can I buy a house with no money down? If you can’t fathom a 20% or more down payment, there are other options. The other option is a down payment that’s much lower – closer to 3-5%. Some banks even offer loan terms with no money down. But don’t get too excited about a small down payment or none at all – it comes with a number of caveats. The Federal Housing Administration (FHA) is a government agency that helps would-be homebuyers with moderate incomes get approved for a home loan. To do this, the agency guarantees a portion of the overall balance of the loan. FHA loans have some of the lowest down payment rates in the housing industry: as low as 3.5%. In addition, if you have a down payment lower than 20%, you generally have to pay for private mortgage insurance (PMI) which is a type of insurance private lenders and the FHA require when you pay less than the 20% benchmark. You’ll also most likely see that fee worked into your monthly mortgage balance. If other loan programs don’t have mortgage insurance requirements, they might still charge you more upfront in the form of other fees. Regardless, paying less in a down payments means you will probably be paying more in fees and a higher interest rate on your home loan. So you pay more over the life of the loan. 4. Get Pre-Qualified for a Mortgage Sometimes, lenders use these the terms “pre-qualified” and “pre-approved” interchangeably. However, prequalification is considered the first step on your journey to getting a mortgage. Getting pre-qualified for a mortgage means you’re giving the lender your financial background information such as gross and net income, assets, outstanding debts, and credit score. Using this information as a guide, the lender looks at your information and tells you the mortgage terms you may qualify for. Usually, the pre-qualifying process is informal because it doesn’t require hard evidence of your financial details – most of the information is self-reported. 5. Get Pre-Approved for a Mortgage Pre-approval for a mortgage is the more formal option, a step above pre-qualification. It involves providing the receipts, if you will, that prove your financial health. This involves documentation like income verification, proof of identity, and a hard inquiry into your credit. Always ask the lender directly what they mean by “pre-approval” or “pre-qualification” to avoid confusion. To apply for pre-approval, you’ll need to provide a lender with hard financial evidence. You can reasonably expect these documents and proof will be necessary: Social Security number and photo ID. Proof of employment and income: A letter from your employer stating your salary, hire date, and employment status. Copies of your most recent W-2 (proof of past income) along with two most recent payroll stubs (proof of current and ongoing income). Form 1099s and your most recent year-to-date most profit and loss statement if you’re self-employed or a freelancer. Real estate income: take note of the rental income, lease, market value, and address. Proof of residence. Bank account: usually the last 60 days’ worth of statements are required. Gift letters: If someone is helping you out with the down payment on your house, they need to draft up a formal gift letter as proof their financial present is a gift you don’t have to pay back. Monthly expenses and debts: Credit history, rent, bills, car loans and other financial obligations. Again, check with your lender for the specifics of what you’ll need, this is simply a guide. 6. Mortgage Options Available Conventional Loans A conventional loan is a home loan that isn’t government-backed. There are two types, conforming and non-conforming. Conforming loans follow the rules and upper limits for loan amounts set by Freddie Mac and Fannie Mae. You can expect to pay for private mortgage insurance with this option if you are paying less than 20% for the down payment. Mortgages that are non-conforming are also called “jumbo loans”. This means they go above loan limits outlined by the government, and is typically suitable for wealthy buyers looking to purchase a home in an affluent area. FHA Loan and other Government-backed Mortgages While the federal government doesn’t dole out mortgages, it does help in the home-buying process. The Federal Housing Administration (FHA), Department of Agriculture (USDA), or the Department of Veterans Affairs (VA) all offer loan programs to help more Americans buy homes. The most common government-backed program is an FHA loan. An FHA loan is an option for borrowers who can’t put down 20% on their home purchase, who have subpar credit or have higher DTI ratios. This loan can also help borrowers who have alternative sources of credit they want to be considered during the mortgage application process like utility bills, cell phone bills, gym membership fees, and rent. Fixed-Rate Mortgage This type of mortgage option gets paid off in set increments of time: 10, 15, 20 or 30-year terms at a stable interest rate. The most common is a 30-year fixed mortgage. The interest rate is determined by the loan term period, along with numerous other factors. In general, the shorter the loan period, the lower the interest rate. The main benefit of a fixed-rate mortgage is security. Despite changes in the market, your interest rates will be locked in. Property taxes and insurance fees might change but month-to-month, you can expect a stable payment. If you plan on moving in the future (in 5-10 years after buying your home), consider looking at adjustable mortgages. Adjustable-Rate Mortgage Loans Adjustable-rate mortgages, otherwise known as (ARMs), usually have a lower initial interest rate than fixed-rate mortgages but after a set period, the interest rate on your loan changes at routine adjustment intervals. After the initial fixed-period interest rate is over, the lender sets a new rate based on an index – aka the latest market rate – in addition to a predetermined margin, to get the new rate. That doesn’t mean your mortgage rate always goes up, it can increase or decrease your monthly payments. Most ARMs have hard limits on the amount the interest rate and monthly mortgage payment can fluctuate. When considering an ARM, pay attention to the starting interest rate, the length the rate will stay that amount, and the adjustment periods. You’ll also want to look at the payments that you might have to make at the high extremes of your cap so that you can be confident you can make those future payments. ARMs may be a good option for those who expect their income to rise to ensure they’re able to cover higher mortgage payments or if you plan to sell your house before the fixed-interest rate is over. 7. Find the Right Mortgage Lender Every lender is unique. Make sure you’re comparing and shopping around – you have nothing to lose and over the lifetime of your loan, even small fractions of a percent can save you lots of money. This is because each lender has different standards and procedures with their loan terms. Research: Check out current mortgage rates so you know the general market conditions. Chat with your real estate agent: They’re a great resource to use and may have connections within the mortgage and home loan industry. Ask friends and family for recommendations: Make sure you still make the decision that’s best for yourself and the parameters of what you can afford, your risk tolerance, and other considerations. Compare, at a minimum, three lenders: Take note of what each lender’s fees and down payment requirements are, be an informed customer. 8. Turn in Your Application If you go with the same lender that pre-approved you, the hard part is already over. You simply need to update your newest financial information. If not, you’ll need your tax returns from the last two years, your most recent pay stubs, your W-2 forms, bank statements, proof of identification, and any outstanding debt liabilities. Each lender has their own requirements, so double-check with them for all required forms. 9. Waiting Out the Underwriting Process The underwriting process involves your lender deciding if you’re going to be officially approved for the loan. During this time, the same details of your financial history that were investigated in the pre-approval process are probed once again. The lender will order a house appraisal to see if the loan amount matches up with the value of the property. At this point, you can order a home inspection. Any defects found can be negotiated during the closing process like repairs or even a lower sale price. 10. Closing Process You’re almost there. There are a few things to remember and do while you close. Closing involves a lot of signing and formal documents – your closing agent will help guide you through it and make sure all the proper steps are taken. But here are a few things you don’t want to forget: Choose if you want to pay discount points: This means you pay a fee (points) to lower your interest rate. If you’re planning on staying in your house for seven years or more, you may want to consider this. Get homeowner’s insurance: This is required by your lender. If you don’t choose your own insurance, your lender may choose one for you (and it could be a pricey policy). Your best option is to compare policies and pick one based on your needs. Final walk-through: Make sure agreed-upon repairs actually happened and that there are no changes to the house. Get your closing disclosure: This will list your closing fees. Cashier’s check: You’ll need to get this from your bank to pay the closing fees. Learning how to get a mortgage can empower you during the sometimes arduous process of buying a house. Knowing where to get a mortgage, your mortgage options, and the terms of your loan agreement will help make the process go as smoothly as possible. Save more, spend smarter, and make your money go further Sign up for Free Previous Post #RealMoneyTalk: Expectation Setting This Holiday Season Next Post A 4-Step Holiday Debt Management Guide Written by Mint Mint is passionate about helping you to achieve financial goals through education and with powerful tools, personalized insights, and much more. More from Mint Browse Related Articles Housing Finances Should I Refinance My Mortgage? When to Refinance Home Ownership How To Lower Your Monthly Mortgage Payment Housing Finances What Is a Mortgage? Financial Planning Mortgage Refinance Guide (When & How to Refinance) Housing Finances Chapter 06: What Is a Mortgage? Home & Refinance How To Get Rid Of PMI Housing Finances FHA Streamline Refinance [Rates, Closing Costs & M… Housing Finances 17 Questions to Ask Your Mortgage Lender Housing Finances How to Get Pre-Approved for a Mortgage Housing Finances 15-Year vs. 30-Year Mortgages: Which is Better?