How to apply for a mortgage

Buying a home will probably be the largest financial transaction in your life, and almost certainly one of the most complicated.

Three-quarters of homebuyers take out a mortgage to finance their purchase, which adds even more layers of complexity.

If you're new to the process, you may be asking, "Where do I even begin?"

CNBC Select walks you through the five steps of the mortgage process, including what to do if you hit roadblocks.

Before applying for a home loan, you want to make sure you are presenting the best financial profile: Lenders will pore over your credit score, assets and debt-to-income ratio to determine your mortgage rate.

Here's how to get your finances in order before you start the mortgage process.

Pay down debt

Not only can debt hurt your credit score, but it can impact the terms of your mortgage rates: Though many lenders will go as high as 50%, a debt-to-income ratio of 43% or lower is preferred.

A ratio of 35% or lower is likely to get approval for the best rates

That means you're paying no more than 35% of your salary toward credit card bills, auto loans, and other debts — including your future mortgage payment.

Work on your credit score

Although VA loan lenders may accept FICO scores as low as 500, a 620 is the most common benchmark for a conventional mortgage. Even higher is better — borrowers with credit scores of at least 760 generally qualify for the best rates.

You can improve your credit score in several ways

• Make on-time payments. The most important aspect of your credit score is payment history, which accounts for about 35% of your number. For lenders, being able to pay your bills on time makes you a lower risk. That's not just credit card bills, either — it includes utilities, car loans, student loan debt and more. Consider setting up autopay or reminders to help stay on track.
  
• Keep your credit utilization rate low. While it's essential to make at least the minimum payment every month, paying off your bill in full reduces your credit utilization ratio (CUR), or the percentage of your total credit limit you're tapping into.
  
  To calculate your credit utilization ratio, divide the total of all the balances on your credit cards (and other revolving credit accounts) by your combined credit limit from all of them. Experts recommend keeping your CUR below 30% to get a mortgage. A ratio of 10% or lower, however, will qualify you for the best rates.
  
• Don’t open too many accounts at once. The two main credit scoring companies, FICO® and VantageScore®, will review how many accounts you've opened in the past few weeks. They'll also look at how many credit inquiries you've had in the same timeframe — including for loan applications and requests for credit limit increases.
  
  Frequent inquiries suggest financial instability (and ding your credit), so only apply for what you truly need.

• Dispute errors on your credit report. Over 40% of consumers who look at their credit reports find mistakes. And more than a quarter said they found errors that could make them look riskier to lenders.
  
  The three major credit bureaus are Experian®, Equifax® and TransUnion®, and you can receive a free report annually from each at annualcreditreport.com.

Your lender will take both a preliminary (during preapproval) and final review (during the underwriting process) to verify your identity, employment, credit history, assets, debts and more to help them determine the likelihood you'll pay the loan back on time.

Getting these documents in order early can make the process go more smoothly.

• Identification: Your lender will require an approved identification with your full name, picture and date of birth — such as a passport, driver's license or other state ID.
• Social Security card: Your SSN will be used to run a hard credit check during any preapproval or final application process. To prevent these inquiries from tanking your credit, all the credit checks in a 45-day period count as a single inquiry. 
• Proof of steady employment: Typically, you'll need to present W2s and tax returns for the past two years, proving you've had the same job or worked in the same field.
• Proof of income: You'll need paystubs from the past two months to authenticate your salary information.
• Bank statements: Lenders typically require statements from the past two months to verify you have adequate savings and to check for any red flags.
• Gift letter: If some of your down payment is coming from friends or family, you'll need a letter explaining who is gifting the money, where the funds are coming from and your relationship with the donor.

Preapproval is the ticket to get into the showroom: A preapproval letter is a preliminary commitment from a lender, showing you how much it's willing to give you, what your interest rate will be and what your monthly payments will look like.

Unless there is a significant change in your finances, your preapproval offer should mirror your final offer. Getting a preapproval letter before you start house-hunting shows real estate agents (and sellers) that you mean business.

You should get letters from multiple lenders to make sure you're getting the best rates. Preapproval does require a hard credit check, but any applications submitted within a 45-day window are considered a single inquiry. So test the waters and use the best offer to negotiate with the seller.

How to apply for mortgage preapproval

You can apply for preapproval online, over the phone or, your bank has a physical location, in person.

You'll need to tell the lender the size of the loan you want and how much you can afford to put down. Then, you'll submit the documents you gathered in Step 1, plus any additional paperwork your lender requires.

Find out how long they'll adhere to the terms of the letter, so you know how much time you have to shop with your offer. Many institutions will give borrowers up to two or three months, but they're only legally required to honor the terms of the preapproval for 10 days.

It can also take up to 10 days to learn if you've been preapproved. Some lenders market themselves as moving much faster, and others promise prequalification in a matter of minutes.

Prequalification can be useful but it's just an estimate, not a binding offer. It doesn't require a hard credit check, and you won't be able to use it to make a bid on a house

If you're denied mortgage preapproval

If you're turned down for preapproval, your lender should send you a notice clearly explaining why. If not, you're within your rights to request one.

You may have been denied simply because you completed a form wrong, which is an easy correction. However, it might have also been due to your financial situation, employment record or credit history.

If your credit score was the reason, find out which credit scoring model the lender used (like FICO Score 2 or VantageScore 4.0) so you can make sure there were no errors. Lenders must inform applicants which credit scoring model they used if it factored into a denial.

If there are no errors, you'll need to go back to Step 1 and work on your finances before shopping for a home again.

If you've gotten to this step, congratulations! You're this-close to owning your dream home.

Once the seller has accepted your offer, you'll need to inform the lender that you want to move forward with their loan offer.

You do that by submitting what's called a letter of intent.

Ask the lender about their specific process — and do it as quickly! According to the Consumer Finance Protection Bureau, lenders only have to adhere to the terms outlined in a preapproval letter for 10 days.

According to Experian, however, most lenders will lock in your offer for 30 to 90 days.

Once you send your letter of intent, your rate and terms are set and your lender will start the underwriting process.

A mortgage underwriter will now carefully examine all the information they have about you — and the property you hope to buy.

To minimize risk, they'll scrutinize:

• Your credit history: To determine the likelihood you'll fully repay the loan
• Your income, debt and expenses: To weigh your ability to afford the monthly mortgage payments
• The property The lender will schedule a home appraiser to determine if the property is worth the amount being lent.

The Appraisal

As part of the underwriting process, your lender will contract an appraiser to determine the home's fair market value and whether the asking price is too high. (While the lender schedules the visit, the borrower pays for the appraisal as part of their closing costs.

If your appraiser comes back with a lower figure, your offer could be rescinded. According to real estate data analytics firm CoreLogic, 8.6% of all homes in 2024 were appraised at a lower value than the sale price.

To avoid this, CoreLogic recommends buyers have an appraisal contingency clause included with their offer to the seller, to ensure they're paying fair market value.

Title search

Your lender will also hire a title company to conduct a title search on the property, guaranteeing that the seller is the only person who has a legitimate claim to ownership.

The title company will also provide title insurance, which covers the lender if the property is not free and clear of liens, encumbrances or disputed claims. (The borrower pays for both of these services with the closing costs.)

Homeowners insurance and mortgage insurance

If you're taking out a mortgage, you'll almost certainly need to buy homeowners insurance. In some regions impacted by extreme weather, getting approved for a homeowners policy can be difficult and expensive.

Several major insurance providers have slowed or stopped issuing new home policies in California and Florida because of disaster-related claims and the accompanying rising costs of construction and reinsurance.

In addition to homeowners insurance, you'll typically also be expected to buy private mortgage insurance (PMI) if you make a down payment of less than 20%.

Mortgage insurance protects the lender if timely payments aren't made, not the borrower: You could still face foreclosure if you default.

According to Freddie Mac, the average cost of PMI is about $30 to $70 annually for each $100,000 borrowed. If you had a $300,000 mortgage, for example, you could be looking at $150 a year.

Once you accrue 20% home equity, your lender will typically allow you to drop the PMI.

Closing day has come: The last step in the mortgage process!.

Usually, you'll close on your mortgage at the same time you receive the keys from the seller, with attorneys, lender representatives and a notary in attendance.

A growing number of lenders are enabling remote closings, however, which can enable all or most of the proceedings to be done digitally. Whether a lender can offer a digital closing typically depends on the state.

Documents

There is plenty of paperwork to sign at closing, including a promissory note, which outlines the amount you'll borrow, the terms of repayment and when and where payments need to be sent.

Other documents include a mortgage instrument, which spells out your rights and responsibilities as a borrower and allows the lender or mortgage service company the right to foreclose if you fail to make payments as agreed.

You'll also sign a closing disclosure form, which illustrates both the original estimated and final closing costs associated with your mortgage.

Closing costs

Closing costs is a broad phrase that can often be rolled in with lender fees.

Lender fees are paid to the lender to cover the cost of processing and underwriting the application. Closing costs include payments to third parties like the title company, the appraiser, the notary and the IRS.

Depending on the lender, loan type and the state you live in, you can expect all your fees to total between 3% to 6% of the overall cost of your home.

On a $300,000 house, that's another $9,000 to $18,000. So be sure to budget ahead.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage review is based on rigorous reporting by our team of expert writers and editors. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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