Shop for a new home or get pre-approved? Which to do first and why.

If you’re considering the purchase of a home, you may be wondering where to start. Should you begin by finding homes you like online? Should you talk to a mortgage professional first to see what you can afford? And if you talk to a mortgage professional, should you get pre-qualified, or pre-approved? These are common questions for new home buyers, but in this post, we’ll offer some helpful insight into the process.

Knowing what you can afford.

Although there’s no rule set in stone, it is generally considered a good idea to get pre-approved for a mortgage before beginning the search for your dream home. There are two main reasons for this:

1) It will help you understand what you can afford, thereby narrowing down your real estate search.

2) Having a pre-approval letter from your lender gives you more clout as a buyer.

Home sellers know that pre-approved buyers have already done the necessary legwork to secure financing and are serious about buying a home. Buyers who are not pre-approved may be seen as “looky-loos” – people who are just “seeing what’s out there” and aren’t ready to actually make a purchase.

For these reasons, it is usually best to get pre-approved before you begin looking at homes, and certainly before you submit an offer.

Pre-Approval vs Pre-Qualification

Although these terms sound similar, they mean very different things. Being pre-approved for a mortgage means your lender has thoroughly reviewed and verified your financial picture, including your credit history, credit score, employment history, current debt and assets, etc., and anticipates lending you up to x amount of money for the purchase of a home.

With pre-qualification, a lender has simply made contact with a potential borrower and has taken the initial step in the mortgage process. With pre-qualification, lenders usually only get a rough idea of the borrower’s finances. It isn’t until the pre-approval process that the information provided to the lender is verified.

Not ready to get a mortgage, but still want to look at homes for sale? Follow these tips:

If you feel the urge to browse through the real estate listings in your area before getting involved in the mortgage process, following these tips can help you avoid potential frustration (for yourself and home sellers).

1. Look around online or drive past the listings you like, but don’t reach out to the sellers or their agent unless you are really serious about it. Most people who have homes for sale are living in their homes while they’re on the market, so coordinating a showing can impact several people’s schedules and become a real inconvenience.

2. Investigate your own finances and try to come up with a realistic home buying budget. Evaluate how much money you make, how much you spend and what your major debts and assets are. If you do this, you may be able to get a good idea of how much home you can afford. This will help you narrow down your search and prevent you from wasting the time of sellers/sellers agents if you can’t afford their home.

3. On major real estate websites like Zillow and Trulia, there will usually be a mortgage payment calculator on each listing page. Use this to get a ballpark estimate of what your overall house payment would be, including the interest rate, homeowners insurance, and property taxes. Again, this will help you understand what you can realistically afford.

For example, if you fall in love with the 4 bedroom colonial with backyard pool, but realize it’s about $500/month higher than your budget allows, you might be a little disappointed – but better to be disappointed now, before you’ve invested a lot of time and effort.