7 Simplified Steps to Take Out a Mortgage

Don’t have hundreds of thousands of dollars lying around? Honestly, neither do we. Luckily, lenders offer mortgages to cover whatever you can’t pay upfront for a house.

Applying for a mortgage can be a little overwhelming, to say the least. We simplified the jargon (preapproval, prequalify, underwriting, oh my!) to make the process a streamlined experience. Below is a brief outline of the steps involved, which you can focus on one at a time:

1. Explore your options

Have a look at the mortgage options offered by various lenders. The numbers between them may not seem that different, but even a slightly lower interest rate can save you a sizeable chunk of money throughout the life of your mortgage.

2. Prequalification

In some cases, this is the first step toward taking out a loan. You’ll submit some financial information, and in return, you’ll get a quick, informal estimate of the amount you can borrow.

3. Preapproval

Preapproval is a lender’s formal, written statement of the maximum amount they’ll loan you, assuming you meet all the conditions of the loan. In other words, it will give you a reasonably dependable idea of the budget you’ll have to work with. Being preapproved before you can start house shopping has become an industry-standard in real estate. Before it gives you its preapproval, however, the lender will want to verify your finances. They’ll look at your tax returns, bank statements, credit score, and more.

(Note: Some people use the terms preapproval and prequalification interchangeably, but they are two different steps in the loan application process. And while some lenders offer both, others go with one or the other. Be sure to ask your lender which method they use.)

4. House-shop

Now that you have an idea of your budget, it’s time to have some fun! Look online, go to open houses, work with a real estate agent, and see what’s available in your price range. Once you find something you want, you’ll make an offer through your agent. If it’s accepted by the seller, you’ll sign a document called a purchase agreement. This lists the terms of the sale, including the price, what you’re buying, who will pay for closing costs, a timeline, and other details.

5. Loan processing

With the purchase agreement in place, it’s time to notify your lender to start processing your loan. You’ll file a completed mortgage application and receive a Loan Estimate within three business days. The Loan Estimate is a three-page standardized form that explains the terms of your loan.

6. Underwriting

If everything in the Loan Estimate looks OK to you, the lender will turn things over to an underwriter, a financial expert who verifies that all of the information in your application is correct. Note that you may be asked for more information in this step, such as your most recent pay stub or proof that you applied for homeowners insurance. You may also need to meet additional conditions, like paying off other debt or coming up with a larger down payment for the house. You’ll have to meet all the requirements to receive final approval for the loan.

7. Closing

Congratulations! You’ve made it to the final step: closing the loan (also known as settlement). You’ll sign all the final documents and the lender will issue your mortgage.

Confused about your credit? Our post “The 5 Determining Factors In Your Credit Score” breaks it down for you.