Take steps like preparing your finances, determining how much you can afford, and finding your best mortgage option help take the stress out of homebuying.
Unless you can afford to purchase a home fully with cash, you’ll need to borrow money and get a mortgage loan.
This involves several key mortgage steps, each of which is important to understand – including preparing your finances, determining how much you can afford, exploring mortgage programs, shopping for lenders and rates, getting mortgage preapproval, finding a home and making an offer, applying for a home loan, closing on the financing, and managing your mortgage.
Step 1 — Prepare Your Finances and Credit
To qualify for a mortgage loan, you’ll need to satisfy your chosen lender’s eligibility requirements.
“Lenders want to see that borrowers are financially stable and can manage debt responsibly,” explains Carl Holman, director of marketing for Foundation Mortgage Corporation. “That’s why your credit score, income history, and debt levels matter.”
Your credit history and credit scores show how reliably you have handled debt, and can directly impact loan pricing and approval. Steady income makes future payments more likely. And your monthly debts versus income, as measured in your debt-to-income (DTI) ratio, reflects how well you’ve managed your financial liabilities.
It’s a good idea to check your three free credit reports at AnnualCreditReport.com, carefully review all the details, and dispute any inaccuracies or errors you spot. Your current bank or credit card company can likely provide your credit scores for no charge.
“You can improve your credit rating and scores by paying your bills on time, every time, for at least 12 months; paying down your revolving credit balances to reduce utilization; avoid opening any new credit accounts in the 60 to 90 days before and during mortgage underwriting; and building savings so that you have plenty in reserve when it’s time to buy a home,” recommends Steven Glick, director of mortgage sales for HomeAbroad.
Step 2 — Determine How Much You Can Afford
It’s smart to follow common rules of thumb when it comes to your finances. One is the 28/36 percent rule. This dictates that no more than 28% of your gross monthly income should be spent on housing, and no more than 36% should be spent on all debts combined.
Your DTI ratio is another benchmark financial tool to follow.
“Your DTI is determined by adding up your monthly debt payments and dividing that by your gross monthly income before taxes. Lenders use this number to assess your ability to take on and repay new loans. A lower DTI means you are in a stronger position – ideally at a 35% or less ratio,” notes David Hyde, vice president and senior home loan manager at BOK Financial.
Use a mortgage affordability calculator to determine what you will likely pay and can afford when it comes to mortgage loan principal, interest, property taxes, and insurance.
“Also, determine a realistic budget that you can swing and qualify for,” Glick continues. “Conventional mortgage loans can be had for as little as 3% down, while FHA loans require as little as 3.5% down. If you qualify for a VA or USDA loan, on the other hand, no down payment is required.”
You will likely need to pay private mortgage insurance on conventional loans if you make less than a 20% down payment; the same is true of FHA loans.
Step 3 — Explore Mortgage Types and Loan Programs
Let’s take a closer look at different mortgage loan types and loan programs available, as well as the benefits and drawbacks of each type.
| Mortgage type/program | How it works/key features | Pros | Cons/Risks | Notes |
|---|---|---|---|---|
| Fixed-rate mortgage loan | Interest rate and monthly principal + interest stay the same for full term (15, 20, or 30 years) | Predictable payments. Easy budgeting. Shields from rising interest rates | Initial rate may be higher than introductory ARM. If rates fall, refinancing is needed to benefit | Most popular among buyers seeking stability. Many clients pick 30-year fixed unless they plan to sell or refinance soon. |
| Adjustable-rate mortgage (ARM) loan | Lower fixed rate initially (e.g., 5, 7, or 10 years), then periodic adjustments tied to an index + margin | Lower payments in early years. Can be good if you sell or refinance before adjustment period | Risk of rate/ payment increases. Uncertainty over long term. Caps or floors sometimes limit flexibility | Typical products: 5/1 ARM, 7/1 ARM, 10/1 ARM. Always stress-test your budget for worst-case scenario. |
| Conventional loan (conforming/non-conforming below jumbo limit) | Loans that meet Fannie Mae/Freddie Mac guidelines (credit, debt ratio, property type, etc.) | Flexible programs. You can cancel PMI. Competitive rates (when credit is good) | Requires stronger credit, reserves, down payment. Less lenient with borderline profiles | Check conventional loan limits. |
| FHA (Federal Housing Administration) loan | Government insures loan; allows lower credit scores/down payments | Lower down payment (3.5%). More lenient on credit history. Helps those with moderate credit | Mortgage insurance often required for life of loan (or long time). Stricter home condition requirements. Loan limits vary by county | Many first-time buyers use FHA. But if you can qualify for conventional, you may get lower long-term cost due to PMI removal. |
| VA (Veterans Affairs) loan | For eligible veterans, active duty, or surviving spouses; VA guarantees a portion of loan | 0% down often allowed. No monthly PMI. Usually favorable terms for eligible borrowers | One-time “funding fee” (may be waived in some cases). Lenders may impose extra overlays. Eligibility criteria can exclude some | Many veterans don’t use full entitlement but get favorable financing. Always check period of service, discharge status, etc. |
| USDA (U.S. Department of Agriculture) loan | For eligible rural areas and moderate incomes | 0% down in many cases. Encourages rural homeownership | Must meet geographic (rural) and income eligibility. Guarantee fee applies. Some lenders may have overlays | If your target property lies in an eligible rural area (per USDA map) and your income is within limits, this can be a great option |
| Jumbo loan | Loans exceeding local conforming limits | Financing for higher-priced homes. Many banks/credit unions offer them | Higher rates and stricter credit standards. More reserves required. Fewer lenders and less standardization | When your desired home price is above local conforming limits, you have no option but jumbo. |
There are also special assistance resources available to eligible applicants, including down payment assistance (DPA) programs that can help cover your down payment and/or closing costs. These are often in the form of grants, forgivable loans, or low-interest loans.
Step 4 — Shop for Lenders and Mortgage Rates
It’s crucial to carefully compare lenders and shop around, the experts agree.
“Rates and fees can vary more than most people realize. That’s why it’s smart to get at least three loan estimates, which won’t hurt your credit if done within a short window of time,” says Zev Freidus, president of ZFC Real Estate. “Be sure to compare annual percentage rates, closing costs, and service quality for transparency and responsiveness.”
Having a real conversation with a lender can give you valuable context behind the numbers they quote.
“You want someone who is focused on your financial requirements, who can explain why one loan product works better than another, and who is committed to getting it right,” notes Hyde.
Glick recommends locking in your mortgage rate after your purchase contract is signed and your full loan application is submitted, at which point most variables are known.
“Choose a lock period that matches your projected closing timeline – 30, 45, or 60 days is common. Sometimes markets move favorably after you lock. In those cases, some lenders offer a float-down, whereby you can relock to a lower rate. Confirm in writing if yours does,” he advises. “Avoid locking in prematurely or too late.”
Step 5 — Get Preapproval/Prequalification
Next, it’s time to get prequalified for a mortgage loan – or even better, preapproved.
“Prequalification is simply an informal loan estimate based on self-reported information,” Holman says. “Preapproval is a verified review of your credit, income, and assets. You’ll need to submit more documents like pay stubs, W-2s, tax returns, bank statements, and identification. Preapprovals usually last 60 to 90 days.”
Prequalification typically involves a soft credit inquiry or none at all, while preapproval requires a hard credit pull.
“Preapproval is better because the lender will give you a preapproval letter stating conditions are met, which can impress the home seller – especially in competitive markets,” adds Glick.
Step 6 — Find a Home, Make an Offer, and Contract
Before long, you’ll need to start hunting for properties, which involves attending open houses and private showings, whereby you tour homes for sale.
“Your real estate agent can help you identify homes that fit your budget, goals, and desired location. Once you find the right home, you can submit an offer drafted by your agent,” Freidus says. “Expect to pledge earnest money – typically 1% to 3% of the purchase price – which shows good faith and is applied to your closing costs if the deal proceeds.”
Your purchase contract (also called purchase or sales agreement) will bind you and the seller to terms, subject to conditions.
“Making an offer usually includes contingencies – which means the conditions that you and the seller agree on. These protect both parties and ensure that everyone is clear on the expectations before closing,” Hyde says.
Common offer contingencies include a:
Financing contingency, which stipulates that you must be approved for the mortgage loan
Appraisal contingency, which states that the home must appraise at or above your offer
Inspection contingency, which allows you to walk away or renegotiate the contract if you or a professional finds any defects in the home
Title contingency, as title reports must be clear of liens and encumbrances
Home sale contingency, which dictates that your existing home (if you are selling one) must close for your purchase to proceed.
Step 7 — Submit Mortgage Application and Underwriting
Once your offer is accepted and your deposit made, it’s time to properly submit your full mortgage application. After this point, your lender must issue a loan estimate within three business days, and you will receive disclosures (for example, Truth in Lending, and servicing disclosures).
“Your lender will ask for updated pay stubs, bank statements, tax returns, and other more recent documentation. They will run a hard credit pull and possibly a credit recheck before closing,” Glick points out. “They will also verify employment via phone calls or other means. Any large deposits or financial transfers they observe from you will need explanations via documentation. And they may also request proof of homeowners insurance, HOA documents if applicable, flood zone disclosures, and more.”
At this point, expect a scheduling and completion of a professional home appraisal by a licensed appraiser, who will provide a valuation of the property. If the appraisal comes in low, below your contract price, you must resolve this gap by either renegotiating with the seller, bringing more cash to closing, or walking away. If any serious issues – like a faulty foundation, structural problems, or urgent repairs – are discovered, your lender may require repairs before loan approval.
“This is also the stage when a title search will be conducted by your title company or attorney, who will check for liens, easements, judgments, and other issues. Prepare to pay for title insurance. Lender title insurance is required, but owner title insurance is optional although highly recommended. The bottom line is that, if title issues arise, they must be cleared before closing,” suggests Glick.
Step 8 — Review Closing Documents and Close the Loan
A closing disclosure is issued at least three days before closing, which will reflect final costs compared to the initial loan estimate.
“Your closing expenses could average 2% to 5% of your loan amount. These costs are split between the buyer and seller, depending on negotiations,” Holman says. In general, the buyer typically pays most lender and third-party fees, while the seller pays other items like transfer taxes and title insurance in some states.
Before closing on the loan, you’ll conduct a final walk-through to confirm the property’s condition. This is often done the day before or the morning of closing so that you can verify that any agreed-upon repairs are complete.
Then, be prepared to sign all loan documents at closing. This involves meeting in person or virtually at a designated location where you will sign the loan note, deed, disclosures, affidavits, and other paperwork. The lender will send the mortgage funds to your title company, and your title will be recorded in the county registry, while the deed will be recorded in your name.
“Ownership will transfer once the deed is in your name, at which time you will legally own the property,” Glick says. “After funding, you will receive keys to the home – often the same day. The title company will notify all parties involved, disperse funds, and issue title insurance.”
Step 9 — After Closing: Managing Your Mortgage
Your mortgage payments will typically begin the month after you close. Many borrowers opt for autopay to avoid any missed or late payments and an escrow account in which taxes and insurance are collected by your lender and then paid for on your behalf.
“Your lender shouldn't disappear after closing. They should walk you through how to set up payments, monitor your escrow account, and plan for future opportunities like refinancing or avoiding private mortgage insurance,” says Hyde.
Refinancing can make sense if rates drop significantly or your credit improves. And PMI can usually be canceled upon request when you reach a 20% equity position, automatically ending at 22%.
“Some conventional loans will allow you to pay a lump sum toward principal and re-amortize to lower your monthly payment without a full refinance, which is called recasting,” Glick adds. “Or, you can opt for an early payoff of your loan, which can save thousands otherwise spent on interest. The good news is that most consumer mortgages do not carry prepayment penalties, but always confirm with your lender.”
Common Pitfalls and Tips for First-Time Borrowers
There are common mistakes you want to avoid before closing on your loan. Here’s a rundown:
Don’t open new credit accounts, including new credit cards, car leases, or other accounts, during your mortgage loan process, as this can negatively affect your DTI ratio and make you look riskier to the lender.
Avoid large purchases before closing, including major expenditures on automobiles, furniture, or other big-ticket items. “You’d be surprised how many people lose their approval because they financed new furniture before closing,” Hyde points out.
Don’t omit or hide any financial details. Be fully transparent about debts, site hustles, and lesser-known accounts.
Don’t reduce earnings or switch jobs before or during underwriting without consulting with your loan officer.
Don’t overextend yourself. “Be conservative with your housing budget, leaving room for maintenance, property taxes, and unknowns,” recommends Glick.
Don’t forget about your interest rate lock expiration date.
Avoid going it alone. Partner with an experienced real estate agent, trusted lender, and, if necessary, a skilled attorney, and ask questions about anything you don’t understand.
FAQs/Quick Answers
What credit score is needed?
The minimum credit score needed varies by loan type. For conventional/conforming loans, aim for at least a 680 credit score for the best rates and fees. FHA loans necessitate at least a 580 score if you put 3.5% down, or a credit score between 500 and 579 if you make at least a 10% down payment. For VA and USDA loans, there is no minimum score requirement, although many lenders prefer a 620 or higher score. Jumbo loans often demand scores above 700.
Are down payment assistance programs real?
Down payment assistance (DPA) programs are run by state housing finance agencies (HFA), municipalities, nonprofits, and community development organizations. These are legitimate programs that offer grants, forgivable loans, or deferred second mortgages to help with down payment and/or closing costs. To verify the credibility and validity of a DPA program, confirm that they are HUD-approved or state HFA-approved.
What is PMI, and when does it end?
PMI is private mortgage insurance, which is required on most conventional loans and paid by the borrower when their down payment is less than 20%. PMI is necessary to protect the lender in case of default. PMI automatically terminates when you’re loan-to-value ratio reaches 78%. You can also request cancellation of PMI once you reach a 20% equity position. For FHA loans, mortgage insurance is required but goes away after 11 years if you make at least a 10% down payment; if your down payment is less than 10%, this insurance lasts for the life of the loan.
How long does closing take?
On average, closing often takes around 30 to 45 days from loan application to completion. Delays can happen due to underwriting issues, appraisal setbacks, title problems, conditions not cleared, or document lag.
Can I get a mortgage with student debt?
It’s possible to get a mortgage loan even if you have student debt. Student loans are merely one factor in your total debt-to-income ratio, which a mortgage lender will carefully review. Having student debt won’t automatically disqualify you from qualifying for a mortgage loan. Managing payments responsibly and having a stable credit and income history help demonstrate your ability to repay both types of loans.
Final Thoughts and Next Steps
Getting a home loan involves several different mortgage steps that must be completed one by one and in order. Armed with the right knowledge and resources – including a trusted team of experts like a real estate agent and experienced lender – you can navigate this process more smoothly.
Begin the journey by carefully assessing your finances, checking your credit, and salting away every extra penny you can. To get a better idea of your budget and what you can afford, use a mortgage calculator or contact a lender via MortgageResearch.com.
