3 Things to Know Before Applying for a Mortgage

Getting a mortgage so you can buy a home can be a massive challenge, especially these days. Home prices are up considerably, even compared to pre-pandemic prices. For example, the average home in 2022 sold for $454,525, versus the 2019 average of $320,250 (per the Federal Reserve Bank of St. Louis). But that's only half the story; mortgage rates have shot up, too. The average mortgage rate in 2019 for a 30-year fixed rate mortgage was just 3.94%, but by the end of 2022, the average had gone up to 5.34% -- and it's still climbing (also per the Federal Reserve Bank of St. Louis). These factors can make getting a new mortgage seem like an impossible task, but going into your mortgage application with open eyes and a better idea of what you'll need to do throughout the process can make it a little bit easier.

No one likes surprises when it comes to their future home, after all. Here are just a few of the things you need to know before you apply for a mortgage.

1. You'll have to prove your income, even if you're self-employed

Your income is a big part of the mortgage loan equation, and its importance cannot be stressed enough. If you can't prove your income, you can't buy a house, period. If you have a regular 9-to-5 job, it's pretty simple, as all you'll need are copies of your tax returns and a few pay stubs. Where it gets dodgy is if you're self-employed or have a side hustle that you want to use to help you qualify.

Lenders are looking for signs of stable income. That's why things like short-term overtime are generally not considered in an income equation, since it's (sometimes) optional and never guaranteed. The same goes for 1099 work of any flavor. You have to prove it's long-lasting or it doesn't count.

If your primary job is a 1099 job -- say, for example, you're a freelance writer -- then all you need is to show that you've had this business established for at least two years and have filed as many years of taxes. If the income on those tax returns is stable, then you have no problem. If it's growing, that's good, but you may not be able to qualify for the full mortgage loan amount you may expect with this year's income. Let's say that you made $35,000 in 2020, your first year of business, and then made $55,000 in 2021. Lenders are unlikely to trust that your 2022 income will be $55,000 or greater, and instead opt to qualify you with an income that's somewhere between the two years.Side hustles are subject to the same kind of equation, including your having filed taxes for two years for that business. If you can't prove you've been doing it for two years or more, it's unlikely that you can count it toward your income for qualification purposes.

2. Your credit file and work history are verified more than once

So, you got your qualification letter and you've found a house that you adore. Now you can relax, right? Oh no. This is the time to really be the most freaked out, if you're going to freak out at all. See, when you're trying to buy a house, a mortgage lender needs to know that you're ready and that your life is stable. They verify this in a number of ways, but one that people least understand or realize is happening are multiple credit and work history checks.

Your employer will be contacted and your credit history pulled shortly after application. But these things are also checked again just prior to your closing day, when the loan is actually funded, to be sure nothing has changed significantly.

People do a lot of funny things when they're under stress, and even if your lender tells you not to open another credit line before you close on your mortgage (for example, with the intent of furnishing your house), you might forget that little rule and do it anyway. This can really mess up your debt-to-income ratio, which can then disqualify you for your loan. Or maybe you've forgotten to make a few payments while you've been house hunting. If that shows up prior to your closing date, you're going to be caught red-handed and could be left with nothing just days before you're meant to close.

The same goes for your employment. Banks do verify that you continue to work at the same job close to closing day. They need to know that you're not just taking out this giant loan and then quitting your job forever with no means to pay it back. This generally applies more to full-time workers, but some types of side hustles can be verified as well.

If either item fails the second round of verification, your loan will not close. I've seen this happen so many times to people, and they are always surprised that the bank found out they quit their job or bought a new car in the weeks before closing day. The bank knows. Just keep everything calm and ripple-free until after you sign the papers, then you can become the chaos goblin you know you are.

3. The underwriting process can be complicated

The underwriting process is complicated for a reason. It's all about the bank determining your risk of default. That's why consistency in your credit and work history matters so much.

Overall, the process goes something like this: You can generally expect to meet with a loan officer who will discuss your debts and assets with you, as well as help determine, based on what you're telling them, what kind of loan would fit you best, be it an FHA loan, a VA loan, a conventional mortgage, or something else. They'll send you home with a list of documents to gather based on that conversation, and you need to do that quickly. They'll also pull a full credit report and ask you to sign a loan application.Once all of that is sent to underwriting, the bank representative will literally determine how risky you are. They may need more paperwork, if there's something they aren't sure about, like income or assets. Once all that is cleared, you have essentially been approved. However, your house hasn't been, if you've even found one yet.

A second round of paperwork is going to be involved once you've found the house you want to buy, once you yourself are approved. This might include the home inspection, or an FHA appraisal, along with universal items like proof you can buy homeowners insurance. Only once you and the house have both been approved can you proceed to closing.

Be prepared for your mortgage application

Whether you're applying for a mortgage today, or in two years, it's really important that you're prepared for what may come. By being aware of how the process works, you can save a lot of stress and pain. Although waiting for closing can cause a lot of anxiety and sleepless nights, once you've closed, you're done, and you never have to do it again (unless you want to).