Q&A: How Do I Get a Mortgage Loan?

Welcome to the Home Buying Institute. We have been educating home buyers since 2006, and we're glad to have the opportunity to help you as well. Our website offers hundreds of articles related to the home-buying process. We also feature a question of the month -- and this month it's all about how to get a mortgage loan.

Reader question: "I've heard the mortgage process has gotten a lot more complicated since the housing market went bad. How do I get a mortgage loan these days? Can you explain the steps that are involved, and why things are so different these days?"

In reality, the process required to get a mortgage hasn't changed that much. Sure, lenders are stricter today than they were before the housing market imploded. And yes, you will probably have to provide some additional paperwork and face some added scrutiny. But the process itself still works like it always has -- more or less.

What You'll Need to Get a Mortgage in 2012

Whether or not you can get approved for a mortgage will depend on several factors. Credit scores, debt, income and down payment are at the top of the list. These are four of the most important factors that will make the difference between approval and rejection. So let's talk about each of these items in turn. Then we can discuss the actual steps required to get a mortgage loan.

Credit Score -- Within the context of this article, I am referring to your FICO credit score. This is the one used by most mortgage lenders when you apply for a loan. This is a three-digit number between 300 and 850. It's basically a tool for risk analysis. Lenders use it to determine how risky you are, as a borrower. To get a mortgage loan in the current lending environment, you'll probably need a FICO score of 620 or higher. Some lender set the bar at 640. You might qualify for an FHA loan with a lower score.

[Learn more: FICO score needed to get a mortgage]

Debt -- Lenders are more concerned with debt levels today than they were during the housing boom. If you have too much debt in relation to your gross monthly income, you might not be able to get a mortgage loan. This is referred to as your debt-to-income ratio (DTI). Lenders are most concerned with your combined debt level, including the mortgage payment you will have if you get the loan. There's no magic number here. But if your debt obligations are using up more than half of your income, you may find it hard to get approved.

[Learn more: The problem with having too much debt]

Down Payment -- You will probably need to make a down payment of some kind to get a mortgage loan in 2012. There are only two exceptions that I'm aware of, the VA loan program and the USDA program (both of which allow for 100% financing). For a conventional mortgage, you'll probably have to put at least 5% down. Some lenders require 10% at a minimum. Your down payment could be as low as 3.5% on an FHA loan.

[Learn more: How much of a down payment do I need?]

The 5 Steps We Recommend

Here's the bare-minimum approach: If you want to get a mortgage loan, you could simply apply for one and cross your fingers. This is actually how a lot of first-time buyers do it. But it's not a very proactive approach. It doesn't include some of the most important (but often overlooked) steps in the process, such as budgeting. So let's go above and beyond the bare minimum.

Here are the 5 steps we recommend:

1. Determine your budget. How much can you afford to pay toward a mortgage payment each month? If you can't answer this question, you're not ready to speak to a lender. Despite the stricter lending environment we are seeing today, it's still possible to get a mortgage that's too big for you. This makes you "house poor" in the short term and could lead to foreclosure in the long term. Here's how to determine your budget.
2. Choose the right mortgage. How long are you planning to stay in the house? How much of a down payment can you afford? And what's your current credit situation? Answering these questions will help you choose the right type of loan based on your particular situation. Learn more about your mortgage options.
3. Check your credit. We talked about the importance of your credit score above. It has the power to make or break your chances of getting approved. The exact score you need to get a mortgage loan will vary based on (A) the lender you use and (B) the type of loan you are seeking. If your FICO score is currently below 620, you may have trouble finding a lender to work with. Here's what the experts have to say about it.
4. Get pre-approved. Mortgage pre-approval is when the lender reviews your qualifications as a borrower (credit, debt, income and employment) to find out if you meet their minimum standards. This process will reveal two critical pieces of information. First of all, you'll find out if you can even get a mortgage loan with that particular lender. They'll also tell you how much they are willing to lend. Here is some more information about the pre-approval process.
5. Find a house. Once you've completed the steps explained above, you're in a good position to start the house-hunting process. You know how much you can afford to pay each month. You understand the pros and cons of the different types of loans. And you've been pre-approved by a lender.
6. Hold your breath for underwriting. Once you've found a suitable home and made an offer to buy it, you would go back to your lender for final approval. Your loan would move into the underwriting stage, which is the most nerve-wracking part of the process. The underwriter has the final say as to whether or not you can get the loan.

This is a simplified explanation of how to get a mortgage loan. This website is loaded with useful information on all of these topics (and more). If you would like to learn more about anything discussed in this article, just use the search box at the top of the page.