Applying for a mortgage is not too difficult, but it will involve some effort on your part. If you are planning on taking out a loan to buy a home sometime in the near future, here are five steps to take to make sure that the transaction goes smoothly and that you fully understand what you’re getting into.
1. Shop around before you apply for any mortgage loan. Before you actually apply for a mortgage, it’s a good idea to shop around for the best home loan deal available. You’ll need to figure out where you want to get your loan (through a broker or by going directly to the bank, for example) as well as keep your eyes open for the best interest rate and lowest closing costs. Always talk to several sources to find the best mortgage deal that you can get. (Learn more in Ten Things You Should Do Before Shopping for a Mortgage.)
2. Figure out how much home you can afford. Lenders will ordinarily recommend that you look at homes that cost no more than around three times your annual household income (if you expect to make a 20% down payment and don’t have too much other debt). Another basic rule for determining how much home you can afford is that your monthly mortgage payment shouldn’t be more than around 28% of your gross (pre-tax) monthly income. (To get a rough idea of how much home you can afford, use Nolo’s calculator.)
These figures, however, may not accurately reflect your own financial and personal situation. In many cases, a better way to get a handle on how much you can really afford is to gather up and review your important financial documents, such as pay stubs, bank statements, investment statements, tax returns, recent credit card statements, divorce decrees, and child support documents. Reviewing these items thoroughly will help you design a reasonable budget and show you what you can really afford to pay each month towards a mortgage payment. (You’ll also need most of these documents handy when you actually apply for the mortgage.)
3. Get prequalified for a mortgage. Even if you feel you can afford a certain mortgage amount, that doesn’t mean that a lender will agree with you. One way to get an idea of how much a lender will actually loan you is to get prequalified for a mortgage. To do this, you’ll have to provide your prospective lender with some information about your income, assets, and debts. The lender will then tell you how much it may lend to you based on this information. The lender won’t guarantee that you’ll actually be approved for this amount, but you’ll get a ballpark idea of how much you can qualify for when shopping for a new home. (Learn more about Prequalifying v. Preapproval for a Mortgage.)
4. Fill out an application. Once you’re ready to finalize the mortgage deal, you’ll have to fill out an application. The application will ask for information about you, your finances, and the details of your potential mortgage. Be sure to take your time and be honest when you fill out the application. You’ll seriously jeopardize your chances of getting the mortgage if you include inaccurate or false information in the application.
Along with the application, you’ll need to provide any additional documents requested by the lender (for example, pay stubs, bank statements, tax returns, and so forth). If you don’t already have these available, it could delay the application process.
5. Understand the mortgage you’ve selected by carefully reviewing the Loan Estimate form. If you apply for a mortgage on or after October 3, 2015, the lender must deliver or mail to you a form called a "Loan Estimate" no later than the third business day after receiving your mortgage loan application.
This form was created by the Consumer Financial Protection Bureau and is designed to make it easy for borrowers to understand the terms of the mortgage they have selected. It uses clear language to help you understand the various details about your mortgage loan transaction, such as the interest rate, monthly payments, and the total closing costs. Be sure to review this form carefully. (You’ll also get a user-friendly "Closing Disclosure" three business days before you close on the mortgage loan.)
Note: You won’t receive a Loan Estimate or Closing Disclosure if you apply for a mortgage prior to October 3, 2015. Instead, you will receive two other forms – a Good Faith Estimate (GFE) and an initial Truth-in-Lending disclosure, rather than a Loan Estimate. And, in the place of a Closing Disclosure, you’ll get a final Truth in Lending disclosure and a HUD -1 Settlement Statement. (Learn more about these forms in Nolo’s Getting a Mortgage area.)