Applying for a Home Mortgage | Heritage Family Credit Union

The process of securing a mortgage can be an intimidating one at times, particularly for first-time homebuyers. But by gaining a better understanding of the process before jumping in, homebuyers can make applying for their mortgage loan smoother, easier, and less overwhelming.

The entire mortgage-application process takes about one to two months on average. And from pre-approval to closing, knowing how to apply for a home mortgage in advance can help you navigate the application steps with clarity and confidence. To get you better acquainted with how to apply for a home loan, we’ve put together this 10-step home loan application guide detailing the key parts of the process.

1. Research Mortgage Loans and the Application Process

Before you get started with the mortgage-application process, get familiar with the basics of home financing and learn more about some of the terms and acronyms you’re likely to hear along the way to closing. For example, when deciding what type of mortgage loan to take out, you’ll want to know what sets fixed-rate and adjustable-rate mortgages apart.

Mortgage pro guidance: The primary difference between a fixed-rate mortgage and an adjustable-rate mortgage is that interest rates are locked in with a fixed-rate mortgage, while they can change over time with an adjustable-rate mortgage.

Other important words and phrases to know while learning how to apply for a home mortgage include:

Down payment: The money a homebuyer pays up front toward the purchase price of a home, with financing typically covering the remainder
Annual percentage rate (APR): The amount of interest a homebuyer pays to borrow money over the course of a mortgage loan, expressed as a yearly percentage of the total amount borrowed (with certain lender fees and closing costs included)
Debt-to-income ratio (DTI): An indicator of a borrower’s capacity to take on debt that denotes the percentage of a homebuyer’s monthly gross income that goes toward making debt payments
Private mortgage insurance (PMI): A type of insurance (often mandated when a homebuyer’s down payment is under 20%) designed to protect lenders against losses should the borrower default on the loan
Fixed-rate mortgage: A type of mortgage for which the interest rate (APR) stays the same over the duration of the loan
Adjustable-rate mortgage: A type of mortgage for which the interest rate (APR) can fluctuate over time based on a benchmark interest rate or index reflecting market conditions
Escrow account: An account, typically managed by a third party, in which a portion of funds from a homebuyer’s monthly mortgage payment is held to pay expenses such as property taxes and homeowners insurance premiums

2. Assess Factors Affecting Your Mortgage Eligibility

Before approving a mortgage loan, lenders will look at indicators of your financial well-being and creditworthiness. Leading factors that can affect your mortgage eligibility include your:

Household income
Credit score (For most conventional mortgage loans, a credit score of 620 or higher is typically required for approval, with scores of 740 or higher often enabling better rates and terms.)
Payment history
Debt-to-income ratio
Assets and savings
Ability to meet eligibility requirements for various mortgage loan types, including government-backed or government-insured loans such as FHA loans, VA loans, and USDA loans
Capacity to make a sizeable down payment

You should know in advance where you stand in all of these areas, and reviewing a free copy of your credit report can be a good place to start. If you have time, you can also take steps to improve your financial standing before applying for a home mortgage by paying down your debt and boosting your credit score.

Evaluating your financial standing can also help you determine your homebuying budget. To determine how much you can afford to borrow for a mortgage, many financial professionals recommend using the 28/36 rule, which dictates that:

No more than 28% of your gross monthly income should go toward covering housing expenses.
The costs of your total monthly debt (including your housing expenses) should not exceed 36% of your gross monthly income.

3. Get Pre-Approved for a Mortgage

By getting pre-approved for a mortgage loan, you can learn how much money a lender is willing to let you borrow to buy a home. Not only can going through the mortgage pre-approval process help you better determine your homebuying budget, but it can also show sellers and their real estate agents that you’re serious about buying a home and have the financial capabilities needed to do so.

Mortgage pro guidance: While getting pre-qualified for a mortgage can also be a helpful step in determining your homebuying budget, it’s not as powerful as getting pre-approved. The difference between pre-approval and pre-qualification is that pre-approval is a more thorough evaluation of your creditworthiness requiring documentation of your income, assets, and debts. Pre-qualification is a less-formal assessment based on self-reported estimates with no documentation required. Because the process behind it is more involved and thorough, pre-approval carries more weight.

4. Find the Right Home and Make an Offer

Once you’re pre-approved, it’s time to start shopping for your future home. In many cases, a real estate agent can help make your search more efficient as you look for options that meet your needs and requirements related to home location, size, school zoning, and features. A good real estate agent can also offer expert insights on your local housing market, help navigate you through the homebuying process, and help you make important decisions such as what type of mortgage loan to take out.

Mortgage pro guidance: The best type of mortgage for any homebuyer will vary based on the borrower’s financial situation, credit history, needs, preferences, and ability to qualify for first-time homebuyer programs, mortgage and down payment assistance programs, or government-backed and -insured loans such as FHA, VA, and USDA loans.

5. Back Your Offer and Finalize Your Mortgage and Lender Choices

After you find the right home, make an offer, and have it accepted, you’ll likely be required to put down earnest money to back your offer. This is a sum of money, typically 1% to 3% of the agreed-upon sale price (though sometimes higher in more competitive markets), that is held in escrow to protect the seller against any losses sustained if the sale falls through. If the buyer backs out without a valid reason (as outlined in the purchase agreement) before closing, the seller is often entitled to keep the earnest money.

Next, you’ll want to finalize your decision on the type of mortgage loan that best meets your needs. If you haven’t already, this is also the time to shop around mortgage rates and terms, then select your lender of choice before making your mortgage application official.

6. Gather Needed Income- and Asset-Related Documents

Your mortgage lender will require you to submit various documents with your mortgage application, largely in an effort to confirm your identity, income, creditworthiness, and overall financial well-being. For example, homebuyers almost always need to provide their tax returns with a mortgage application, even if they’re self-employed.

The documents you’ll likely need to supply when you apply for a mortgage include:

Proof of Income

Personal income tax returns from the latest 2 years
W-2 forms and 1099 forms from the latest 2 years
2 months’ worth of your latest pay stubs
Documentation of any Social Security benefits received
Documentation of any child support or alimony received
Documentation of any pension or disability income received
Business tax returns and/or profit and loss statements (for business owners)

Asset Documentation

Most recent personal and business (when applicable) checking and savings account statements
Most recent retirement account statements
Most recent investment account statements
Documentation of any bonds and/or any certificates of deposit held
A donor-signed gift letter for any gift funds to be used
Documents related to any currently owned properties such as mortgage statements, tax bills, and proof of insurance

7. Submit Your Application

With your home found, your offer accepted, and your documents collected, now is the time to officially submit your mortgage application. In many cases, for added convenience, borrowers can start a mortgage application online. Alternatively, homebuyers who would prefer to apply in person can also visit a lender branch or location during business hours to fill out all the necessary application forms and pass along the needed documentation.

8. Avoid Any New Debts

On average, it takes 30 to 60 days for a borrower to get a decision back from a lender regarding mortgage loan approval. While waiting for news about your approval status, it’s important to avoid opening any new lines of credit, taking out any new loans, or making any other big changes to your financial situation. While your loan application is being processed, any money-related moves you make that affect your credit score or debt-to-income ratio could have an impact on your mortgage application’s approval.

9. Get Final Approval and Prepare for Closing

Once your lender completes loan processing and underwriting, you’ll get a final decision on your loan’s approval status. Some of the things that could cause your mortgage application to be denied include:

A low credit score
A poor credit history
A high debt-to-income ratio
Inadequate income
Unstable employment
Insufficient funds for your down payment or closing costs
Property-related issues such as a low appraised value or substantial concerns about the property’s condition raised during inspection
A failure to meet the requirements of your chosen loan program
Errors or omissions in your application

If your mortgage application is approved, your lender will provide you with a Closing Disclosure (CD) that outlines the full terms of your mortgage loan, along with all of your final costs. Review it carefully, and if you have questions, don’t hesitate to reach out to your mortgage lender or real estate agent for any needed guidance. If you approve of all the details in your closing documents, you’ll need to be ready to make your down payment and pay closing costs, plus get a homeowner’s insurance policy to cover your new home.

10. Close on Your New Home

At your closing, you’ll meet with your closing agent(s) to sign all the paperwork needed to make your home purchase official. You’ll need to bring along a cashier’s check or arrange a wire transfer to pay your closing costs, plus provide a photo ID and proof of the homeowner’s insurance policy you’ve arranged for your new home. After all your paperwork is filled out and signed, congratulations — you’re a new homeowner!

Whenever you’re ready to get started with your mortgage application steps, Heritage Family Credit Union is here to help. We offer a range of resources to help you better understand our home loans and the mortgage-application process, and our mortgage specialists are glad to answer any questions you may have along the way. Contact us today to learn more about all of our mortgage offerings.

How To Apply for a Home Mortgage: A Step-by-Step Guide

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