How to Qualify for a Home Loan: Essential Steps

Buying a home is one of the largest financial decisions you'll make, but qualifying for a home loan can feel overwhelming. The process involves several steps and considerations, such as meeting lenders’ underwriting requirements.

Knowing what lenders evaluate can help you prepare and increase your chances of approval. This guide outlines everything you need to know to confidently navigate the mortgage qualification process. 

What to expect from the mortgage qualification process 

Qualifying for a mortgage loan involves several steps. Lender requirements can vary, but the process of applying and securing a home loan is generally the same across most private lenders. 

Before approving a home loan, lenders assess your financial health to determine whether you can afford the loan and are likely to repay it. The mortgage qualification process typically includes the following: 

• Prequalification: Many lenders allow potential borrowers to prequalify for a mortgage loan. During prequalification, lenders perform a less stringent review of your finances to determine how much you can borrow. Afterward, lenders provide estimated loan interest rates. 
• Loan application: Prequalification doesn't guarantee approval. You must formally submit a loan application, which includes sharing detailed personal and financial information with the lender. 
• Underwriting: The underwriting process is a thorough analysis of your financial health and personal details, including your creditworthiness, income, and assets. 
• Approval or denial: Once the lender processes your application, you'll receive an approval or denial based on the lender's assessment. 

In some cases, you can prequalify or get pre-approved for a home loan online within minutes. Loan decisions can take a few weeks up to 60 days or longer. 

You can potentially speed up the process with some advanced research and planning. This starts with reviewing your credit profile, evaluating your current financial situation, gathering personal information, and collecting the documents you'll need during the loan application process. 

Check your credit score and credit report

It's important to understand your credit profile before you begin applying for a home loan. Lenders use your credit score to assess how likely you are to repay the loan. Your credit report contains detailed information used by lenders during the underwriting process, including your payment history, number of credit accounts, and negative marks, which could be red flags. 

Some banks and credit card issuers offer free credit score access. Several free and paid services exist that allow you to check your credit score online. A free credit score monitoring tool also lets you check your score anytime without impacting your credit. 

You can access free credit reports from the three major credit bureaus at AnnualCreditReport.com. Previously, consumers could access their reports once every 12 months through the website. Now, you can access reports from Equifax, Experian, and TransUnion once a week for free. Review your report for any errors or fraudulent information. File a dispute with the credit bureau if you find any inaccuracies that are hurting your credit. 

Review your debt-to-income ratio (DTI)

Your debt-to-income ratio (DTI) measures how much of your monthly income goes toward paying debts. DTI is one of the factors lenders use to determine if you can afford additional debt from a mortgage. 

To calculate your DTI:

• Add up all monthly debt payments, such as credit cards, auto loans, and student loans. 
• Divide the total by your gross monthly income. 

Lenders generally prefer a DTI below 36%, though FHA loans may accept DTI ratios up to 50% in some cases. Having a lower DTI demonstrates financial stability and may increase your chances of approval. You can lower your DTI by paying down existing debt. 

Save for a down payment and closing costs

When you buy a home, there are upfront costs you need to consider, including a down payment and closing costs. Your down payment amount affects the loans available to you. It also affects your overall monthly mortgage payments. 

Down payment requirements vary depending on the type of mortgage loan: 

• Conventional loans: Lenders typically require a down payment of at least 3% to 5% of the purchase price. If your down payment is below 20%, you're required to pay private mortgage insurance until you've built up sufficient equity in your home. 
• FHA loans: FHA loans require as little as 3.5% down with a credit score of 580 or higher. 
• VA and USDA loans: These two government-backed loan programs offer options with no down payment requirement but may carry other fees. 

Closing costs include administration and processing fees related to a homebuying transaction. Some closing costs are negotiable, while others are paid either by the buyer or seller. They can include application and origination fees, credit reports, home inspections, title insurance, appraisal fees, and other expenses. 

Closing costs typically range from 2% to 5% of the purchase price. Some closing costs can be rolled into your mortgage, lowering the amount you'll need to save upfront when buying a home, but it could cost more in the long run. 

Gather documentation for income and assets

When you apply for a mortgage, you'll need to provide lenders with specific personal and financial information. Lenders require proof of income and assets to verify your financial stability and determine your ability to make mortgage payments. 

Documents you must provide may include: 

• Driver's license or other government-issued photo ID 
• Social Security number
• Pay stubs for the last month or two
• W-2 forms for the past two years
• Tax returns, especially if you are self-employed
• Recent bank and investment statements
• Documentation of other significant assets

Choose the right type of loan for your needs

Several types of mortgages are available, so finding the best option for you can set you up for long-term financial success. The right loan type depends on your situation and financial goals. When comparing lenders, consider factors like credit score, down payment, and DTI requirement. Here are some other factors to consider when choosing a mortgage loan: 

• Loan purpose: Some loan types, like VA and USDA loans, are only available for primary residences. Look at other loan options if you are buying a second home or an investment property. 
• Loan term: Mortgage loan terms often range from 15 to 30 years. Shorter loan terms usually come with higher monthly payments but lower total interest. Long-term loans can lower monthly payments but mean higher total interest costs. 
• Fixed vs. adjustable rates: Fixed-rate loans offer consistent payments over the life of the loan, while adjustable-rate mortgages (ARMs) may start with lower interest rates that can fluctuate after the initial period. 
• Closing costs and fees: Compare lenders' closing costs, including origination fees, title insurance, and home appraisals. 
• Eligibility for special programs: If you qualify, VA loans or USDA loans offer significant benefits, such as no down payment and competitive interest rates.