Mortgages help make homeownership possible for people who can’t afford to buy a home outright. But to take out a home loan, you need to meet certain eligibility requirements and navigate a long and often confusing process — especially for first-time homebuyers. Breaking down the process of getting a mortgage can help you choose the right mortgage.
1. Calculate Your Debt-to-Income Ratio
Before you can get approved for a loan, your mortgage lender needs to verify that you can afford to pay it back. One way that lenders do this is by looking at your debt-to-income ratio.
Your DTI ratio is a figure that indicates how much of your income is allocated toward paying down debt. You can calculate your DTI ratio by adding up your monthly payments and dividing the total by your gross monthly income, which is the amount you make before taxes are taken out.
Let’s say you have a $300 car payment, a $400 student loan payment, and a $200 credit card payment due each month. Suppose you earn $6,000 per month before taxes. Dividing your total debt payment of $900 by your income of $6,000 gets you to 0.15 — which means your DTI ratio is 15%.
Specific DTI ratio requirements vary depending on the type of lender and loan. To get a qualified mortgage, you typically need a DTI ratio that is no higher than 43%. However, it’s possible to get a home loan with a DTI ratio as high as 50%.
How to improve your DTI ratio
If your DTI ratio seems high, here are some ways to lower it:
- Pay down existing debt.
- Increase your income with a raise or side hustle.
- Account for any additional income like freelance work or alimony payments.
- Reconfigure your debt with a debt consolidation loan.
2. Boost Your Credit Score
Your credit score is another factor that lenders use to determine how much risk you pose as a borrower. It ranges from 300 to 850, and the number affects your ability to get a mortgage as well as the interest rate you’ll pay. Borrowers with higher credit scores typically earn lower interest rates, and borrowers with lower credit scores generally receive higher interest rates.
The minimum credit score you need to get a mortgage varies depending on the loan type:
- Conventional loan: 620 or higher.
- Federal Housing Administration loan: 500 or higher.
- Veterans Affairs loan: No credit score requirement.
- Department of Agriculture loan: No official minimum, though individual lenders may require a score of 640 or higher.
Your credit score is based on information in your credit report, including your payment history and account balances. While there are different scoring models, most lenders look at your FICO score.
How to improve your credit score
If your credit score seems low, here are some steps you can take to improve your score:
- Pay off overdue bills.
- Pay down existing debt.
- Pay bills on time.
- Avoid applying for new credit.
- Build your credit history.
- Review your credit report and dispute any errors.
You can request a copy of your credit report from each of the three credit bureaus — Equifax, Experian, and TransUnion — by visiting AnnualCreditReport.com.
3. Save For a Down Payment
When you take out a home loan, you usually need to make a down payment, which is a percentage of the purchase price.
Minimum down payment requirements vary depending on your lender and loan type. Here are the down payment minimums for some common types of loans:
- Conventional loan: 3%. Keep in mind that putting less than 20% down with a conventional loan means you also have to purchase private mortgage insurance.
- FHA loan: 3.5%.
- VA loan: No down payment required as long as the sales price isn’t more than the appraised value.
- USDA loan: No down payment required.
Saving up for a down payment can take time. After all, a 20% down payment on a $400,000 home is $80,000. Here are some tips on how you can save for a down payment:
- Cut discretionary spending.
- Automate your savings.
- Research down payment assistance programs.
4. Prepare Your Documents
To assess your financial situation and determine your eligibility for a mortgage, your lender will request specific documents. Gathering those documents in advance can help you expedite the process.
While the full list of necessary documents can vary, you should expect your lender to require the following:
- Pay stubs.
- Federal and state tax returns.
- Wage or income documents, such as W-2s and 1099s.
- Bank statements.
- Investment account statements.
- Self-employment documents, such as profit and loss statements.
- Alimony and child support documents, if applicable.
5. Understand the Minimum Requirements for Your Loan
Here’s a rundown of the basic requirements for some common loan types:
Requirements for Different Types of Mortgages
|Requirement||Conventional Loan||FHA Loan||VA Loan||USDA Loan||Jumbo Loan|
|Minimum credit score||620||500||No official minimum, though lenders may require a score above 620.||No official minimum, though lenders may require a score above 640.||680, but can vary depending on the lender.|
|Minimum down payment||3%, or 20% to avoid PMI.||3.5% if your credit score is at least 580, or 10% if your credit score is between 500 and 579.||0%||0%||10%, or 20% to avoid PMI.|
|Fees||Closing costs that can range from 2% to 5% of the purchase price.||Upfront mortgage insurance premium of up to 1.75%, annual mortgage insurance premium of up to 1.05%, and closing costs.||Upfront VA funding fee of 1.65% to 3.6%, and closing costs.||Upfront guarantee fee of up to 3.5%, annual fee of up to 0.5%, and closing costs.||Closing costs.|
|Maximum DTI ratio||50%||43%||41%, or additional requirements if the DTI ratio is higher.||41%||45%, but varies depending on the lender.|
6. Compare Mortgage Lenders — and Make a Choice
It’s a good idea to shop around and compare quotes from several lenders so that you can choose a mortgage lender with the most favorable terms.
After you apply for a loan, you’ll receive a three-page document called a loan estimate. The loan estimate will tell you key details about the loan, including the estimated interest rate, closing costs, and insurance costs. All lenders must use a standardized loan estimate form, which makes it easier to compare the terms of each offer.
7. Get Preapproved
Mortgage preapproval is a letter from a lender indicating how much it’s willing to lend to you, up to a certain amount. Preapproval involves a cursory look at your finances, and isn’t a guaranteed loan offer. However, preapproval can give you a rough estimate of how much mortgage you can afford.
Your preapproval letter also communicates to sellers that you are serious about buying and can likely get financing. In fact, many sellers won’t even consider your offer if you haven’t been preapproved.
Keep in mind that preapproval letters typically are good for 30 to 60 days, so be sure you’re truly ready to begin house hunting.
8. Submit a Mortgage Application
Once the seller has accepted your offer and you’ve chosen a lender, it’s time to officially submit your mortgage application. If you’ve already gotten preapproved and gathered your financial documents, you’re well prepared. You should ask your loan officer how they would like you to submit your information and documents, and confirm that they received your application.
9. Begin the Underwriting Process
During the underwriting process, your lender will review your financial information to confirm that you can afford to keep up with your monthly mortgage payments. Your lender will also schedule a home appraisal to determine the property’s value, while you schedule a home inspection to evaluate its current condition.
The underwriting process can take several weeks. To expedite the process, avoid applying for new lines of credit and be prepared if you’re asked to supply any additional information or documentation.
10. Close On Your New Mortgage
Once your lender completes the underwriting process and approves your home loan, then it’s time to schedule a closing day.
Closing on your home and mortgage is the last — and most exciting — step in the homebuying process. On closing day, you’ll sign the necessary paperwork, make your down payment, and pay your closing costs. Then, the title of the home will be transferred to your name, making you the official owner of the home.
Here are the answers to some frequently asked questions about how to get a mortgage.