Get Pre-Approval Before You Shop

We've said this on other pages for this site and we'll say it again; the best way to start home shopping is buy getting pre-approved for a mortgage. While most of us would prefer to start by looking at houses, it can set you up for disappointment. How can you really shop effectively if you don't know what your budget will be? Getting pre-approved tells you what size of mortgage you can qualify for, and let's you start to do some of the math for yourself.

Frankly, you may also find that you can qualify for a mortgage amount that you really don't want or need. We've seen people who have qualified for up to 6 times their annual salary! While it's nice to know that the lender trusts you to be able to handle that amount, do you feel able to handle that amount? If not, take some time to figure out payments and interest costs and such, and then reduce your house-shopping budget accordingly. (We did. When buying our last home, we decided the size of mortgage we wanted FIRST. Then we went house hunting. Our mortgage payments are easy for us to meet, and we haven't had to give up our yearly vacations.)

The pre-approval process will give you a lot of information, if you ask the right questions. You'll be able to get your own credit score, and see how that translates into a good or better interest rate. As a prospective buyer, you should go to a reputable broker, lender or banker, who understands such things as credit, credit scores, mortgage funding and debt-to-income ratios, in order to get the best information possible. That lending professional can help you figure out very closely the interest rate your credit score entitles you to, how much you are likely to be able to borrow and how much cash you may need for a down payment and closing costs.

All this work up front can save you from some nasty surprises later.

Another really good reason to secure financing before beginning your home search is you may find out you are qualified for special programs! This can help you to have more budget for your home than you would have expected, and also save you money. For instance, a high credit score can qualify you for low down-payment loans or even no down-payment loans through programs such as the FHA. If you are short on cash, you might find that lower down-payment requirements allow you up to buy more house than you thought you could. Always keep in mind that a lower down payment is likely to translate into a higher interest rate.

A final good reason to set up financing first: what if the home of your current dreams comes up on the market, and you aren't prepared to make an offer? In such cases, you can lose a property to another buyer who is ready to make an offer.

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