Unless you can afford to buy a home in cash, you’ll need to get a mortgage. When you’re serious about buying a home, it’s important to understand the mortgage process and to see how much mortgage you can qualify for. Here, Redfin offers five steps for getting a mortgage.
Step 1: Know your numbers
The first step in preparing to apply for a mortgage is to document your monthly debt and income. Lenders look at your debt-to-income ratio to determine how much you can afford to borrow. Typically, your total debt—including a new home payment—should not exceed 43 percent of your income. Another important factor is your credit score. Your lender will run a credit check when you apply for pre-approval, but it’s a good idea to get your own credit report to see if there’s anything you need to work on before applying. Not missing payments and paying off as much debt as you can will help increase your credit score while lowering your debt-to-income ratio.
Step 2: Find a lender
The most common types of lenders are banks, credit unions and online financial institutions. Not all lenders offer the same rates or loan types, so it’s important to shop around. Talk to at least four different lenders and try to compare loan rates, fees and product attributes. Unlike a pre-approval, pre-qualification is a quick, informal process that allows you to compare loan details from different lenders before getting pre-approved. Typically, during a phone call or meeting with a lender, you’ll go over your income, assets and debt. Although it’s important to be honest, your financial information will not be verified by the lender for a pre-qualification. Based on that information, the lender will provide a rough estimate—not a guarantee—of how much money and what types of loans they can offer you.
Step 3: Get pre-approved
Once you choose a lender, you should apply for mortgage pre-approval. Sellers are typically more willing to accept offers from pre-approved buyers because pre-approval shows that the buyer has the financial resources available to make good on their offer. When you apply for pre-approval, your lender will check your credit and ask for all financial documents to accurately assess your financial situation. In addition to two forms of government identification, you’ll also need:
• Work history
• W2 forms from the past two years
• Pay stubs for the past one to three months
• Personal tax returns for the past two years
If self-employed, you’ll need:
• Business and personal tax returns for past two years
• Year-to-date profit and loss statements
• Year-to-date balance sheet
• Total debt
• Names, balances and account numbers for all of the following:
• Credit cards
• Car, student or any other loans
• Store lines of credit
• Other consumer debt with recurring monthly payments
• Alimony payments
• Child support payments
• Divorce decree
• Down payment
• Documentation of down payment, such as checking and savings statements (all pages) showing account balances for two previous months
• Documents showing sources of any large deposits—if parents are helping
• Investment and other assets
• Stocks, bonds or other investment account statements for two previous months
• Retirement account statements, including 401(k) and IRA
• Residence history
• Names and phone numbers of landlords for two previous years
• Current mortgage documentation for two previous years
Once you’re approved, you’ll receive a pre-approval letter. When you find a home you want to buy, your real estate agent will give the seller a copy of your pre-approval letter along with your offer.
