Like HowStuffWorks on Facebook!

How Mortgages Work


Mortgage Application

A lender will look at your employment history and credit history as indicators of how likely you are to pay back your loan. Lenders want to see stability, which means they will look closely any late payments during the last two years of your credit history. They will pay particular attention to any rent or mortgage payments that were more than 30 days past due. They'll also look at late payments for credit cards during the last six months.

Stable income is also important. Lenders look for steady employment with a single employer for the past two years (or at least employment in the same field). Other income -- such as earnings from part-time or freelance work, overtime, bonuses or self-employment -- is also acceptable if it has a two-year history. If you don't meet the minimum requirements, that doesn't mean you'll never quality for a mortgage. You may just have to talk to more lenders or settle for a higher interest rate.

The entire credit market has been tight for several years now. Mortgage lenders give the best interest rates to borrowers with high credit scores (760 to 850) who can make a big down payment (10 to 20 percent) [source: Esswein].

Here is a typical list of the documents you need when applying for a mortgage:

  • Money for the closing costs
  • Completed sales contract signed by buyers and sellers
  • Social Security numbers of all applicants
  • Complete address for the past two years (including complete name and address of landlords for past 24 months)
  • Names, addresses and all income earned from all employers for past 24 months
  • W-2 forms for the two years prior to your loan application
  • Most recent pay stub showing year-to-date earnings
  • Names, addresses, account numbers, monthly payments and current balances for all loans and charge accounts
  • Names, addresses, account numbers and balances for all deposit accounts, such as checking accounts, savings accounts, stocks and bonds
  • The last three statements for deposit accounts, stocks and bonds
  • If you choose to include income from child support and/or alimony, bring copies of court records of cancelled checks showing receipt of payment.

A more detailed list can be found here. Your lender and closing attorney will also tell you what paperwork and documents you will need to present at the loan closing. We'll delve into the closing process on the next page.