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Obtaining Mortgages

Save for a down payment, aiming for at least 20% to avoid private mortgage insurance (PMI). Gather financial documents like tax returns, pay stubs, and bank statements. Calculate your debt-to-income (DTI) ratio (section “Debt-to-Income Ratio (DTI)”). The old 43% figure was the qualified mortgage threshold under the original CFPB Ability-to-Repay rule; the Bureau replaced it in its General QM final rule — issued December 2020, effective March 2021 — with a price-based definition keyed to how far the loan’s annual percentage rate sits above the average prime offer rate, so 43% is no longer a regulatory line at all. Fannie and Freddie will write to 50%. Neither number is your number — re-derive it against net income per section “The Gross-DTI Trap for High Earners in High-Tax States”. Shop around for mortgage rates and get pre-approved to strengthen your bargaining position.

Check Your Credit Score

Review your credit score from all major bureaus (see section “Credit Scores and Underwriting Optimization”). Ensure you obtain your FICO score (see section “The FICO Scoring Model”) (not some other scoring model like Vantage), as this is the model most banks use for mortgage evaluations. Aim for 780 or higher, the top tier of the agencies’ loan-level pricing grid since 2023; 740–759 sits two rungs down and prices measurably worse. Report any errors to improve it.

Pre-qualification

Start by using a pre-qualification calculator available on various websites. These tools, based on self-reported data, can give you an initial idea of whether you qualify for a mortgage. For example, you can use NerdWallet’s pre-qualification calculator.

When entering your income, consider the following:

Getting Pre-approved for a Mortgage (optional)

To make your offer stand out, obtain a mortgage pre-approval from a lender. Unlike pre-qualification, which relies solely on the information you provide, a pre-approval means the lender has pulled credit and verified income and assets — W-2s, pay stubs, bank statements — and issued a conditional commitment up to a stated amount. That is the line the CFPB draws between the two. A letter issued without the documents is a pre-qualification wearing a better name, and listing agents know the difference; ask the lender which one you are holding.

For more detailed information, refer to the Consumer Financial Protection Bureau (CFPB) guidelines on mortgage pre-approval.

Upfront Underwriting (optional)

Upfront underwriting involves submitting your mortgage application and financial documents for review before you find a property. This pre-approval process allows lenders to assess your creditworthiness and issue a conditional commitment, speeding up the final approval once you make an offer. It reduces uncertainty, strengthens your bargaining position, and can lead to quicker closings. While many large lenders provide this service, they often keep it under wraps because it’s an upfront cost for them without guaranteed return.

Shop for a Mortgage

Note: Use a dedicated spam email address and a throw-away phone number for this process.

You do not owe anything to the lender who provided your pre-approval. It is in your best interest to shop around, as even a 1/8 of a point difference in interest rates can save you hundreds or thousands of dollars annually.

1.
Visit Bankrate | bankrate.com to find lenders offering the best interest rates in your area.
2.
Ask your current bank for their mortgage rates.
3.
Check rates with several credit unions.

Note: At this stage, you do NOT need to provide your full Social Security Number (SSN). Simply state, “My FICO score is X”. If they insist on a hard credit pull to give you an accurate rate, hang up. While a cluster of hard pulls technically doesn’t harm your score, it is unnecessary and a red flag if they mislead you from the start.

When comparing rates, ensure you are comparing equivalent offers. Ask each lender for their “0 points, 0 fee” rate. You can consider “buying down” your rate later (paying upfront for a lower interest rate), but during the comparison phase, stick to 0 points.

Once you find a mortgage rate you are satisfied with (after checking with at least 2–3 lenders), you can provide your Social Security number (usually through an online portal), submit basic information, and request a “rate lock”. Until you receive a form that looks like this “Loan Estimate” with “rate lock - YES” checked in the upper-right corner, the lender can change their rates for any reason.

While you are still under no obligation with this lender, most people do not switch lenders at this point. You are now ready to proceed to the formal application and closing process.

Discount Points: Do the Break-Even, Not the Vibe

Buy points only when your expected holding period comfortably exceeds the break-even, and understand that “expected” means the shorter of how long you keep the house and how long you keep the loan. A point is 1% of the loan amount paid at closing to cut the rate, typically by 0.125% to 0.25% — the exchange rate varies by lender and by day, so ask for the full grid instead of accepting the one option they volunteer.

The simple break-even is upfront cost divided by monthly saving:

TBE = p × D M(i) − M(i′)

where p is points expressed as a decimal, D the loan amount, and M(⋅) the monthly payment at the original and bought-down rates. On a $1,000,000 loan, one point costs $10,000 and buys a move from 6.5% to 6.25%: payments of $6,321 and $6,157, a $164 monthly saving, so TBE = 10,000∕164 ≈ 61 months. Five years.

That figure flatters the purchase in two ways, and both matter at this book’s loan sizes. It ignores the return on the $10,000 you handed over — compound it at 7% against the stream of savings and the realistic break-even stretches past six years. And it ignores the option you are writing: if rates fall and you refinance in year three, the remaining value of the points evaporates. Points are a bet that rates will not fall, funded with your own money, with no payoff if you are wrong. In a high-rate regime that bet is backwards. The one clean case for buying them is the opposite situation — a low-rate regime, a loan you intend to keep for its whole life, and cash you have no better use for.

Get the tax treatment right, because it is not intuitive. IRC §461(g)(2), “Special rules for computing deductibility of interest” lets you deduct points paid to obtain a loan on your principal residence in full in the year paid, provided the payment reflects established local practice and does not exceed the customary amount. Points on a refinance, on a second home, or on an investment property get no such treatment: they are amortized over the life of the loan. The consolation is that if you refinance again with a different lender and pay off that earlier loan, the unamortized remainder of its points is deductible in that year — a deduction most people simply forget to claim ( IRS Pub. 936). Refinance with the same lender and the remainder rolls into the new loan’s amortization instead. Also distinguish discount points, which buy rate and are deductible interest, from origination points and processing fees, which buy nothing and are not.

Recasting: The Refinance Nobody Offers You

Ask about recasting before you consider a refinance, especially when your existing rate is below the market. A recast (or re-amortization) keeps your rate, your term, and your loan intact: you make a large lump-sum principal payment and the servicer re-amortizes the remaining balance over the remaining term, lowering the monthly payment. It typically costs $150 to $500 in an administrative fee against the several thousand dollars and full underwriting cycle a refinance demands, and it requires no appraisal, no credit pull, and no rate risk.

The new payment follows directly from the standard annuity formula on the reduced balance:

M′ = B′× r(1 + r)n (1 + r)n − 1

where B′ is the balance after the lump sum, r the unchanged monthly rate, and n the months remaining. Because M′ is proportional to B′, the payment falls by exactly the fraction of the balance you retired: $100,000 against a $500,000 balance at 6% with 25 years left cuts the payment 20%, from $3,222 to $2,577 — $645 of monthly cash flow for the price of an administrative fee. Note what recasting does and does not do: it lowers the payment and the total interest paid, but it does not shorten the term and it converts liquid capital into home equity you can only reach again by borrowing. Prepaying without recasting shortens the term instead and leaves the payment untouched — which is the better choice if your goal is to finish the loan early instead of freeing up monthly cash flow.

Three operational limits: most conventional loans permit one or two recasts and require a minimum lump sum, commonly $10,000 or 10% of the balance. FHA, VA, and USDA loans generally do not allow it at all. And servicers rarely advertise the option, because the fee is trivial next to the origination revenue on a refinance — you have to ask for it by name.

Formal Application For a Mortgage

When you’re ready to apply for a mortgage, most lenders will have you do so through an online portal, though some may still accept applications via email. Typically, you’ll need to provide the following documents:

After a few rounds of review (e.g., “please send us one more month of X”, “please resend this document”, etc.), you’ll be directed to an e-signing portal where you’ll sign the formal application (similar to “Uniform Residential Loan Application”, but pre-filled), various disclosures, and other necessary documents. The goal of this process is to reach the conditional approval stage, which means the primary remaining steps are the appraisal, title work, and closing.

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