The mortgage process may seem scary. This is understandable: Your lender will ask for plenty of paperwork to verify your income and debts. You’ll need to sign what might feel like a mountain of documents. And your lender will closely study your credit history. But the mortgage-lending process isn’t nearly as overwhelming as it seems at first glance.
Start the application
The process starts when you fill out a Uniform Residential Loan Application. This application will ask for your basic information, such as full name, current address and Social Security number, for anyone applying for the mortgage loan. It will also ask for the address of the home you hope to buy.
You’ll also need to provide information on your employer and your work history, your income and your debts. Once you complete this form and provide it to your lender – you can do this online now, if you’d like – your loan will enter the underwriting stage, when your lender studies your income, debts and credit history to determine if you qualify for a mortgage and at what interest rate.
Check on your credit
Your lender will check your three-digit FICO credit score and your three credit reports, one each maintained by the national credit bureaus of Experian, Equifax and TransUnion. This will tell your lender how well you’ve paid your bills and managed your credit.
FICO scores range from 300 to 850, with most lenders considering a score of 800 or higher to be excellent. The higher your credit score, the more likely you are to qualify for a mortgage with a lower interest rate.
Your credit reports list your open credit and loan accounts and how much you owe on them. They also list any late payments, foreclosures or bankruptcies you’ve had in the last seven to 10 years. The cleaner your report, and the less you owe on credit card accounts, the better your chances of qualifying for a mortgage with a lower interest rate.
Verifying your income
Your lender will want to verify your monthly income and savings. You’ll need to send your lender copies of your two most recent paycheck stubs, last two months of bank account statements, last two years of tax returns and last two years of W-2 forms. Your lender might be able to pull this information electronically. If not, you’ll need to send copies of these documents.
Proof of employment
Your lender will also want to make sure that you have a stable source of income. To prove this, you’ll need to provide a letter, on company letterhead, signed by your supervisor stating your place of employment, job title and number of years you’ve worked with the company.
If you are a freelancer or work for yourself, you might have to provide copies of more than two years of your tax returns to prove that your income is steady.
Understand the underwriting
Once your lender has all the information it needs, your loan will go through the underwriting process. During this process, your lender’s underwriting staff will analyze your income, debts and credit to determine how likely you are to repay your loan on time.
When this is done, your lender will tell you how much money it is willing to lend you and at what interest rate. You can accept these terms or shop for a loan with a different lender.
After you find a house and make an offer that the seller accepts, you’ll move to the closing. Here, you’ll sign several papers, including those that make your mortgage loan official and others in which you’ll agree to make a specific monthly payment until you pay off your loan.
Yes, there are plenty of steps in the mortgage process. But understanding them can help eliminate some of the stress of applying for a home loan.