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Mortgage Loan Process: A Step-By-Step Guide

access_time Posted on: May 12th, 2020

Qualifying for a mortgage can feel like a daunting task with all of the paperwork, documentation, and steps needed to go from pre-approval to closing. However, having an understanding of the mortgage loan process in advance can make the journey easier.

Keep reading for a simple step-by-step guide to getting a home mortgage loan.

Prepare Your Finances

Before you ever apply for a mortgage, you want to prepare your finances for making this large purchase. To do so, here are a few steps you should take:

Check your credit score

Your credit score is a significant indicator of your ability to qualify for a mortgage. That’s why it’s essential to know the health of your credit.

Many lenders have a minimum credit score, and your interest rate will be primarily determined based on your current score. You should pull your credit report and review it for any inaccuracies. Also, consider how you can improve your score as much as possible before applying for a mortgage.

Pay off debt

Your lender wants to see that you can afford a mortgage payment. Lowering your debt to income ratio by paying off debt is a great way to do so. Taking this step will also boost your credit score so you can qualify for better loan terms.

Stop accumulating debt

Along with paying off your debt, you also want to stop accumulating more debt.

Hold off on purchasing a new vehicle, using your credit cards, applying for a personal loan, etc. Making any major purchases before applying for a mortgage can negatively impact you as you go through the home loan process.

Gather Required Documentation

After you’ve prepared your finances for the mortgage loan process, you want to begin gathering the documentation that’s needed to apply. Keep in mind that depending on your financial background, this documentation might vary.

Here is a general list of some information you’ll want to have on hand when you apply for a mortgage:

Tax returns

Your lender will likely want to see two years’ of tax returns to verify that your income has been consistent over time. Also, this will confirm that the amount listed on your paystub matches what you’re reporting to the IRS.

Proof of income

Along with providing your tax returns, your lender will request proof of income. The documentation you provide can vary based on the income you want to prove.

If you’re an employee, be prepared to share your pay stubs from last month. If you own your own business, you will need to show your profit and loss statements instead of your pay stubs. If you have other forms of income, such as alimony or child support, gather proof via direct deposit statements.

Bank statements

Lenders want a clear picture of your financial background before approving a mortgage application, so you will also need to provide your bank statements and statements for other assets such as your investment accounts.

They will want to verify that you’ve had the money for your down payment in your account over several months and that you have extra money available to cover the cost of a mortgage payment.

Gift letters

This requirement depends on whether you have family or friends giving you money to cover the costs of your home expenses. If you receive gifts to pay your down payment or other costs, you will need to provide a gift letter stating that those amounts are not loans and do not have to be repaid.

Rental history

If you provide your lender proof of your rental history, it will demonstrate your ability to make monthly payments on time for your residence. There are various ways to prove this, be it a letter from your landlord or canceled checks. Be sure to check with your lender to determine their preferred method of confirming this information.

Mortgage Pre-Approval

After you’ve prepared your financed and gathered the necessary documentation, it’s time to start the pre-approval process.

Getting a pre-approval will show your realtor and the homeowner of the property you want to purchase that you’re serious about your offer. The offer you place on the property will also hold more weight compared to if you place an offer without getting a pre-approval.

This is often a quick process. Your lender will pull your credit and review your on-time payment history along with how much credit you have. They will also provide you with an idea of a loan amount you might qualify for.

Mortgage Application

After a homeowner accepts your offer, you will want to proceed with the full mortgage application. This is when you’ll need to provide all of the documentation listed above. You might also have to give your lender information related to your employment, current debts, the property you’re purchasing, explanations of any financial mishaps, such as foreclosures, bankruptcies, etc.

Get Your Loan Estimate

Once all documentation is received, you will be provided with a loan estimate within three days that details all costs associated with your loan. These costs include closing costs, your interest rate, principal payment, monthly interest, taxes, and insurance.

Also, you will get information related to any prepayment penalties. Receiving your loan estimate is not a guarantee that you’ve been approved. It merely provides you with an idea of costs if you are approved.

Underwriting

The underwriting process is one of the most critical stages. This is a time when an underwriter reviews every detail of your application to confirm that information is accurate and to determine whether you need to provide additional information. While going through your application, they will also be on the lookout for any inaccurate information or potential fraud within your file.

Closing

Once you’ve made it through the underwriting process, you will get your mortgage approval, and the final step of the home loan process is to go to the closing for the home you’re purchasing.

During the closing, you will need to bring any funds due to buy your home, such as your downpayment and closing costs. You will also sign many forms regarding the financing of your new home.

Keep The Mortgage Loan Process Simple

Knowledge and preparation are the two keys to having a smooth home loan process. Before you apply, you want to prepare your finances and documentation. That way, as you’re going through each stage, you’re set for success.

You can learn more about mortgage loans from Belco Community Credit Union

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