How to get a mortgage: Understanding the mortgage loan process

Quick insights

• Understanding how to get a mortgage is a critical part of the homebuying process.
• The mortgage process should start before you begin looking for a home and continues through to closing and taking ownership of your new home.
• Getting preapproved for a mortgage can help improve your chances of having your home buying offer accepted by a seller.

Whether you're a first-time homebuyer or a previous homeowner, the mortgage process can sometimes seem complex. You've been saving for a home, so where do you go from here? We've outlined the process below to help you navigate the homebuying journey.

1. Check your credit score

Getting a mortgage will be based in part on your credit score. The higher your score, the better your chances of being approved for a home loan and the better your terms. Generally, you'll want your score to be at least 620 or above. If it's not where you'd like it to be, there are plenty of ways to improve it, like reducing your balances or paying your bills on time. Having a strong credit score can lower your interest rate, so focus on improving your credit rating.

2. Understand your debt to income ratio

Lenders will ask questions about your financial situation, such as the amount of your monthly debt compared to your total monthly income, or debt-to-income (DTI) ratio. This is the amount of money you bring in each month versus your monthly payments for things such as credit cards, auto and student loans. The lower your debt-to-income ratio, the more likely you’ll be approved for a mortgage loan.

3. Review your savings

If you're ready to buy a home, you may have already started saving for it. Review your savings and decide how much of it you can put toward a new home. Keep in mind things like emergency funds, insurance premiums and any large bills you'll have to pay soon. Deduct what you'll need in the near future to see how much you have left.

4. Decide on a down payment amount

Now that you know how much you can spend on your new home, do the math to see how much of a down payment you can afford. Ideally, you'd be able to put a 3%–20% down payment on the purchase price of a home. A loan-to-value (LTV) ratio of 80% or higher generally requires that you pay private mortgage insurance (PMI) with conventional loans. PMI typically requires a premium that will be added to the total monthly mortgage payment and is considered in your total DTI.

5. Select the right mortgage type

As a homebuyer, you have a wide range of potential mortgage loan options available to you.

• Conventional loans: These are the most common types of mortgage loans available. They usually require a minimum credit score of 620 and a minimum down payment of at least 3%. If your LTV is greater than 80% (less than 20% down) you may be required to pay for PMI.
• FHA loans: Federal Housing Administration (FHA) loans are usually provided by lenders, just like conventional loans, but are backed by the federal government. This allows lenders to offer these loans to borrowers with lower credit scores. FHA loans allow you to pay as little as 3.5% down if your credit score is 580 or higher. You’ll need 10% down if your credit score is between 500 and 579.ec-hud-crd-score-hdbk
• VA loans: U.S. Department of Veterans Affairs (VA) loans are available to qualifying veterans of the U.S. Armed Forces and their surviving spouses. These loans have no down payment requirements and borrowers may be able to qualify with lower credit scores than conventional loans. 
• USDA loans: The U.S. Department of Agriculture (USDA) backs loans for homebuyers in designated rural areas, allowing them to buy a home with no down payment and credit score requirements similar to conventional loans. Chase does not offer USDA loans at this time.

6. Choose your mortgage terms

Once you decide what kind of mortgage you want, you’ll want to see what mortgage terms work best for you. Some of the mortgage loan term variables you’ll want to consider include:

• Length of loan: A traditional loan term is usually 30 years. However, if you’re looking to own your home in less time or pay less in interest over the life of the loan, many lenders offer 15-year terms as well.
• Fixed or adjustable rate: A fixed-rate mortgage allows you to make the same principal and interest payment over the life of the home loan. An adjustable-rate mortgage (ARM) may offer a lower rate for the first three to 10 years of the mortgage and a rate that adjusts at regular intervals after that. 

If you're not sure what those terms mean, there are many resources to help you research the different types of mortgages. Do your homework and pick the one that best fits your unique needs.

7. Find your real estate agent

A good real estate agent is a valuable asset. They can answer questions, help you look for homes within your budget and assist you throughout the homebuying journey. Without a real estate agent, you could find yourself to be at a disadvantage to a buyer who has an agent representing them. Real estate agents are there to help make things as easy as possible, and the seller is responsible for paying the majority of their fees.

8. Determine your closing costs

After you've narrowed down the homes you like, calculate how much the closing costs will be. Generally speaking, closing costs are around 2%–5% of the home's selling price. This may make a difference in the size of the down payment you can afford, which may affect your mortgage.

If you have a real estate agent, they can help you determine this cost, as well as any additional costs you'll have to pay. Your agent may also recommend negotiating these costs with the seller.

9. Consider getting preapproved

Consider getting prequalified or preapproved for a mortgage.ec-hud-crd-score-hdbk Think about this as a test run for applying for a mortgage. You'll answer a series of questions about your finances and then your lender will discuss the mortgages/loan terms you qualify for. But remember—this isn't a conditional approval letter, so you may not be asked for all of the information you need to provide for a full mortgage application.

10. Compare mortgage lenders

As you look for a mortgage lender, pay close attention to their offerings. Be sure to note their mortgage rates and fees (which is best determined by annual percentage rate (APR) as well as any promotions they might have. Talk to lenders to fully understand the type of mortgage you're considering, and be sure they offer the term you're looking for. Once you've found a lender that fits your needs, you can begin the mortgage application process.

11. Gather your documentation

Make sure you have everything in order before you apply for a mortgage. You'll want to have items such as your pay stubs, W2s, Social Security or pension award letter, bank statements, and possibly your Federal Tax Returns (1040s) available.

12. Submit your application

Once you feel you're ready to go from looking to buying, it's time to apply.

Your lender will ask a series of questions to complete your application, including about your finances, personal information, the home you're buying, etc. Your lender will ask for the documents you collected in the previous step. 

This is where you'll choose the type or term of mortgage you're applying for, and provide information about the home you're purchasing. The term of the loan can be changed during the loan process if you haven't fully decided on the best option for your budget at this time.

13. Complete the mortgage loan process

Even with preapproval, your mortgage lender will need to carefully consider your finances before they can approve your loan. This is called underwriting. Some of the steps in the underwriting and mortgage approval process include the following:

• Document proof of income and employment: You’ll need to be ready to provide more supporting documentation, such as additional tax returns, pay stubs and bank statements before your lender can approve your mortgage. You may also need to provide information about your current and past employment so that it can be independently verified by your lender.
• Home appraisal: Your lender will usually require a third-party appraisal of the value of the home you wish to buy. This helps ensure the home’s value doesn’t put them at risk.
• Home inspections: You may not need a home inspection to qualify for a mortgage, but it’s a good idea as a homebuyer. However, some lenders may require specialized inspections to qualify, such as a termite inspection. You may also need a specialized inspection or appraisal if you’re buying a home using a government-backed mortgage, such as a VA loan or FHA loan.
• Title search and insurance: You may also need to purchase title insurance for the home you plan to buy. This helps ensure there aren’t any competing liens or claims of ownership on the home.
• Buy homeowners insurance: Before you purchase your home, you’ll need to secure homeowners insurance for the property. This may include fire/theft or hazard insurance as well as specialized insurance against natural disasters, like tornadoes or earthquakes. If you’ll live in a federally designated flood area, you may also need to purchase a separate flood insurance policy. 

14. Keep your credit status steady

As your application is reviewed, you're encouraged not to make any significant changes to your finances, such as leaving your job, buying a car or applying for any new credit cards. The idea is to remain as close to your DTI ratio and credit rating as when you applied.

15. Close on your home

Once your mortgage application has been approved, you'll take the last steps to officially close on your home. At closing, you’ll sign all the necessary documents and make any final payments required to the lender, homeowner or other parties. After you've put your signature on the last line on the last page, you're a proud new homeowner! This is the part where you get the keys and start moving in—the part you've been saving, studying and working for.

In summary

Before you make any major financial decisions, it's important to do your homework. If you're reading this, you've already begun! But this is just the start. Take time to get familiar with the ins and outs of the process and know what to expect. If you still have questions, a Chase Home Lending Advisor would be happy to help.