Navigating the home loan application process: What to expect

Young married couple sitting among moving boxes show a picture of new home on their laptop after navigating the home loan application process.
February 29, 2024 | Lois Sullivan

If you desire to be a homeowner, being approved for a home loan is a vital first step, as taking out a loan will allow you to purchase the home you've had your eye on without needing the entire price in cash. The home loan application is complex, so it’s helpful to understand what to expect so you can prepare yourself with all the necessary documents. Here’s a guide for navigating the home loan application process, including the types of home loans and the steps you’ll take when you apply.

Preparing for the home loan application

Assessing your financial readiness before applying for a home loan is essential. For example, credit scores are highly significant when applying for mortgages, so check your credit score regularly online to confirm your score is high enough to secure a loan. If you need to improve your credit score, you can open a line of credit and pay it back promptly or rent an apartment to demonstrate you reliably pay rent.

It’s also important to save money before applying for a home loan to prepare yourself for expenses such as the down payment and closing costs. One way to prepare yourself is by getting preapproved. Preapproval means a lender will evaluate your financial data and tell you what types and sizes of loans you qualify for so you can make decisions before officially applying. This can give you a clear idea of what finances you need to prepare and provide real estate agents with your price point when looking at homes.

Understanding the types of home loans

There are multiple types of home loans you can take out. For example, fixed-rate mortgages give you a set amount of time to pay back your loan, during which your rates and monthly payments won’t change. There are also adjustable-rate mortgages, which give you a certain number of years at a low rate before becoming subject to changes in the market.

First-time buyers or buyers with lower credit scores can benefit from Federal Housing Association loans, which offer lower down payments. Similarly, loans backed by the U.S. Department of Veterans Affairs or the Department of Agriculture offer zero down payment, but they involve meeting specific requirements, such as being an active military member or buying land in a rural area, respectively.

The application process step by step

When applying for a home loan, you’ll take a few specific steps before you can secure your dream home. First, getting preapproved for a mortgage is recommended so you know exactly the price range to look for when exploring homes. This involves having a mortgage lender run your credit and check your debt. Then, the mortgage lender will calculate how big of a home loan you qualify for using this information, along with your income and assets. Aside from telling you how much money you can borrow, the lender will also recommend types of home loans that are best for you.

Once you’re preapproved, prepare the documents you’ll use to finalize your mortgage. Necessary documentation includes bank account statements, tax returns, investment statements and employment information. This will also help you confirm your budget, which is the next step in the process. When you finalize the amount you’re willing to spend on your new home, you can start looking for homes in areas where you want to live. After finding the perfect fit, you can submit an offer to the seller and finalize your loan if the seller accepts it.

Underwriting is the next step. This part of the home loan process is where someone from the lender’s office verifies all your information again to ensure nothing changes in your credit or income. While you wait for your underwriter to review the loan application, request a home appraisal to confirm the home you’re buying is in line with the asking price. Finally, you can close on your new home.

While completing this process, being honest and transparent about your finances is exceptionally important. Working with a loan officer is a great way to help with this, as they can guide you through the process and find solutions for you in cases where income, debt or other obstacles make it harder to secure a mortgage.

Factors affecting loan approval

Lenders consider several different factors when evaluating loan applications. For example, one of the first details many lenders will check is your credit score since it significant affects the size and type of loan you can take out. They’ll also review your credit report, as foreclosures and bankruptcies can reduce the amount of money you can take out. Your debt-to-income ratio is another important factor, as it can be harder to secure a mortgage when you have a much higher amount of debt than income.

Similarly, your income and employment status are important, including profit and loss statements if you own a business. This is because a history of unemployment or unstable employment can impact your approval. A few other factors that can affect your loan approval process include your current outstanding debts, whether you pay child support or alimony, and whether you currently have another mortgage.

Potential challenges and how to overcome them

Common obstacles when applying for home loans include high debt, insufficient funds for a down payment and low credit scores. However, you can mitigate these challenges by improving your credit score and saving money through additional income or budgeting. Seeking help from housing counseling agencies can also help guide you through the process and help you find affordable options. You can take several steps to prepare for a home loan application, including saving money, getting preapproved and being mindful of your credit score. It’s beneficial to seek professional guidance when needed, especially if you aren’t sure where to start or have financial obstacles. For example, you can contact an Alliant mortgage loan officer for personalized help from a financial expert.

Want to learn more about home loans? Check out these other articles:

You might like

Sign up for our newsletter

Get even more personal finance info, tips and tricks delivered right to your inbox each month.