The Mortgage Process, Explained

Getting a mortgage can seem daunting. You’ll need to make big decisions about mortgage types, lenders, and properties. The details are often complex, involving a great deal of paperwork, supporting documents, and bureaucracy.

However, at its most basic level, the mortgage process involves only six steps: pre-approval from mortgage lenders, house shopping, mortgage application, loan processing, underwriting, and closing. Understanding each of these steps can help you weather the more complicated aspects of the process. In this guide, we’ll explain everything you need to know.

1. Get Your Pre-Approval

Before you can go house shopping, you need to secure your pre-approval from a mortgage lender. This shows sellers that you’re a serious buyer, as well as helps you narrow down your options during your homebuying search.

Start by figuring out how much you can afford to pay. Keep in mind that an accurate picture of your monthly costs includes not just the loan principal, but also interest payments, taxes, and homeowners insurance. And if you aren’t able to make a 20% down payment on a property, you’ll also need to pay for private mortgage insurance (PMI). A mortgage calculator can show you the impact of different rates on your monthly payment. 

Knowing your budget will help you determine which type of mortgage is right for you. There are several types of mortgages available with different down payment options, credit score requirements, and income restrictions. The most common type of homebuying loan issued in the U.S. is a conventional mortgage, which means that the mortgage is issued by a private lender. However, you might also be eligible for a mortgage through the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), or U.S. Department of Veterans Affairs (VA).

Once you have an idea of the type of mortgage you would like, you can approach mortgage lenders for pre-approval. A pre-approval is a document that states the maximum amount your mortgage lender is willing to loan to you. You can get pre-approved quite quickly—your mortgage lender will just need to run a three-bureau credit report (called a tri-merge) that shows your credit score and credit history as reported by third-party credit bureaus.

2. Find a Property

Most people start looking for properties long before they are pre-approved for a mortgage, and perhaps before they are even thinking of buying a home. But once you have your pre-approval, you’re ready to begin looking in earnest.

There are many ways of searching for a home. You can use online real estate portals like Zillow or Trulia, buy a house at auction, or even look for an off-market home. Just make sure you don’t fall into some of the common mistakes people make when house-hunting.

Making an Offer

Once you’ve found a suitable property, you’ll need to put in an offer on it. Your real estate agent should help you to do this, as different sellers and properties require different sorts of offers.

At this stage, you’ll normally have to put down earnest money, a deposit that indicates you are seriously interested in a property. Typical earnest money deposits are 1% to 2% of the sale price. If you close on a property, this money is put towards the downpayment.

Normally, your offer will also contain contingencies that allow you to pull out of the deal. These are designed to protect you and your money if the house you’ve chosen is not quite what it seems. Common contingencies include:

• Appraisals must come in close to the loan amount, not lower
• Home inspections do not find major issues with the property
• You are able to secure final mortgage approval

3. Apply for a Mortgage

Now you are ready to apply for a mortgage. To do this, you’ll need to approach a mortgage lender—most likely the one that gave you pre-approval, but you should also shop around to make sure you get the best deal.

Each mortgage lender will need information to give you an offer. If you go with the lender who provided your pre-approval, they may have some of what they need already. However, expect to do some digging to get everything in order. Your real estate agent may be able to grab some of the harder-to-find items, such as property taxes.

Your lender should guide you as to what to send and when, but they are likely to need:

Employment
   • Name of current employer, phone, and street address
   • Length of time at current employer
   • Position/title
   • Salary including overtime, bonuses, or commissions

Income
   • Two years of W-2s
   • Profit and loss statement if self-employed
   • Pensions, Social Security
   • Public assistance
   • Child support
   • Alimony

Assets
   • Bank accounts (savings, checking, brokerage accounts)
   • Real property
   • Investments (stocks, bonds, retirement accounts)
   • Proceeds from the sale of your current home
   • Gifted funds from relatives (e.g. a down payment gift for an FHA loan)

Debts
   • Current mortgage
   • Liens
   • Alimony
   • Child support
   • Car loans
   • Credit cards
   • Real property

Property information
   • Street address
   • Expected sales price
   • Type of home (single-family residence, condo, etc.)
   • Size of property
   • Real estate taxes (annual)
   • Homeowner’s association dues (HOA)
   • Estimated closing date

Credit history
   • Bankruptcies
   • Collections
   • Foreclosures
   • Delinquencies

This last item—your credit history—is one of the most important elements in getting your mortgage approved. Because of this, it’s a good idea to check your credit report beforehand to see where you stand.

4. Complete Loan Processing

The next step is for the lenders you’ve approached to pull together all the information you’ve provided into a loan estimate. A loan estimate is a three-page form that presents home loan information in an easy-to-read format, complete with explanations. This standardization not only makes the information easy to digest; it also makes it easy to compare offers among lenders to see which one is offering you the best deal.

You’ll get a loan estimate within three business days of applying for a mortgage unless you don’t meet the lender’s basic qualifications and your application is rejected. If that happens, the lender must give you a written notice within 30 days stating why your application was rejected. The only fee you may have to pay to get a loan estimate is a credit report fee.

When you receive a loan estimate, it’s valid for 10 business days. If you want to accept a loan offer, try to do it within that time frame; the lender may change the terms and issue a new loan estimate if you take more time to decide.

If you accept a loan estimate, your loan will start to be processed. At this stage, your mortgage lender will start to go through and verify the information you’ve provided to them. This includes:

• Ordering a credit report (if not already done as part of your pre-approval)
• Verifying employment (VOE) and bank deposits (VOD)
• Order a property inspection and appraisal
• Order a title search

5. Go Through the Underwriting Process

Though you are unlikely to deal with them directly, mortgage underwriters are actually the key decision-makers in the mortgage approval process and are the people who will give final approval for your mortgage.

Underwriters will check every aspect of your mortgage application and carry out a number of other steps. For instance, borrowers are required to have an appraisal conducted on any property they take out a mortgage against. The underwriter orders this appraisal and uses it to determine if the funds from the sale of the property are enough to cover the amount of the mortgage.

Once underwriters have assessed your application, they will give you their decision. This will either be to accept the loan as it is proposed, reject it, or approve it with conditions. Your mortgage might be approved, for instance, on the condition that you supply more information about your credit history.

If your application is approved, you will then lock in your interest rate with your lender. This is the final interest rate you will pay for the remainder of your mortgage term.

6. Close on the Property

If your mortgage application is approved, it’s now time for closing. At this stage, a large stack of documents will be printed out and you’ll be invited to the title company (or attorney’s office) for a closing meeting.

One of the most important documents you’ll see at this meeting is your closing disclosure form. On this form, you’ll see a column showing the original estimated closing costs and final closing costs, along with another column indicating the difference if costs rose.

Closing costs typically range from 2% to 5% of the home’s purchase price. Thus, if you buy a $200,000 house, your closing costs could range from $4,000 to $10,000. Closing fees vary depending on your state, loan type, and mortgage lender, so it’s important to pay close attention to these fees.

If you see new fees that were not on the original loan estimate or notice that your closing costs are significantly higher, immediately seek clarification with your lender or real estate agent.

If everything looks to be in order, you will sign to accept the mortgage and you will leave the office with the keys to your new home.

3-Day Review Period and Final Walk-Through

At this point, a countdown begins. If no further action is taken, your mortgage will become active in three days. However, at this stage, you have the right to spend three days reviewing your documents to make sure everything is in order.

You should compare your closing disclosure to the loan estimate you received in stage 4 above. Small changes, discrepancies, or typos are allowed, but if you see anything you don’t understand, you should seek clarification immediately.

In addition, certain changes can cause your mortgage agreement to be put on hold. This will happen if:

• The APR on the loan changes by more than one-eighth of a percent (most fixed loans) or one-quarter of a percent (most adjustable rate loans).
• A prepayment penalty is added to the mortgage.
• There’s a change of loan products (for example, a change from a fixed-rate loan to an adjustable-rate loan).

Assuming everything is in order, your mortgage will automatically go live after the three days are up.

Typically, mortgage contracts give you the right to a final walk-through of the property at least 24 hours before your closing. You can use this visit to check that the previous tenant has vacated the property and that they have carried out any repairs that were required.

The Bottom Line

The process of applying for a mortgage can be complicated, but there are a number of distinct steps involved. Most people will go through these six steps: pre-approval, house shopping, mortgage application, loan processing, underwriting, and closing.

The process can be long and stressful, but make sure you don’t rush it. Check all of your documents carefully, make sure you understand the mortgage terms, and seek expert help if you are unsure about anything. You’ll be paying your mortgage for a long time, so it makes sense to get it right.