How Much Can I Afford to Spend on a House?

By Raymond Stoklosa · November 2nd, 2007

Recently, I get this question more and more from home buyers who are concerned about the recent subprime mortgage crisis. Understanding the mortgage process is important to understanding what you can afford. Here is a basic description of some common terms to remember…

Before you start house hunting, you need to determine how much house you can afford, which will entail getting either pre-qualified or pre-approved for a home loan. They are different and one is better than the other. If you’re casually considering buying a home, a pre-qualification is a quick, yet unreliable, first take on your borrowing power. It will give you a general idea of how much you can borrow. If you’re a serious home buyer, a pre-approval is the only way to go. Smart home buyers know: Find a loan first, and then find a home. A real estate agent can help you find a mortgage broker to begin the process.

What do I do to get pre-qualified?

A pre-qualification can be done online or over the phone and does not require your submitting financial documents. You will be asked to provide basic information about your finances — for instance, your household income versus your debt load. With this information, the lender will estimate what your maximum loan amount could be if you were to apply. However, this informal opinion may change should the verification process reveal differences in your financial position or credit rating. You should not rely on a pre-qualification because it does not carry the weight of the genuine loan commitment.

What about getting pre-approved?

A pre-approval is more involved and does result in a genuine loan commitment. The lender will perform an extensive review of your finances, requiring pay stubs, tax records, credit accounts, bank statements, employment verification and more. This commitment indicates that a lender is willing to do business with you and make you a loan under specific rates and terms. With a preapproved loan commitment, you are looked at as a cash buyer with the financial capability to buy. To close your loan, the lender needs only a satisfactory appraisal and a preliminary title report. So to avoid disappointment, find a loan first and then go shopping for a home.

What should I ask when shopping for a lender?

Your real estate agent can recommend mortgage brokers for you to contact. These are lenders who have worked well with past clients and your agent feels comfortable recommending. Another good way to locate a good mortgage broker is to ask your co-workers and friends who have recently taken out a mortgage loan for their recommendations. However, if you decide to do a little comparison shopping and look for a lender on your own, here are a few important questions to ask.

What loan programs do you offer and which one do you think is best for me?
How long will the loan approval process take?
What line items of the loan agreement – if any – are negotiable?
What is your policy for locking in interest rates, and will you honor a lower rate if it declines during the lock-in period?
Are there fees for prepaying on my loan

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