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Step #2: Budget & Financing

You've heard it many times - Your home is likely to be the biggest purchase and most valuable asset you own.  The purchase process can be rather complicated too, so it's important to plan, do your research, use the services of experts, and protect your financial assets, whether they are cash, investments, credit worthiness, or physical property (like your new house).

Some people have enough money in the bank to simply pay cash for their house.  That eliminates the burden of monthly payments and the expense of interest, however there are some situations where it still makes sense to use some borrowed money to pay for your house.  You'll want to discuss all the implications - including the impact on your taxes - with a financial expert.  

If you're like most people though, you'll borrow money to purchase your home, and agree to repay the money over time with interest, using a special loan for real estate called a mortgage.  It's an arrangement involving large amounts of money, and expert advice from a mortgage expert is a must.  

As soon as you start thinking about buying a house, you should make an appointment with a mortgage banker, mortgage broker, or loan officer.  If you have a long-standing relationship with a local bank or credit union, either is good place to start.  Many banks offer mortgages online too, and the Web is a good way to compare rates and services.  One thing to keep in mind:  Local bankers can often consider factors that online bankers and online applications can't take into consideration.  It's also reassuring to have an actual person, available by phone or email, to discuss things related to the mortgage you need.     

Regardless of where you go to get a mortgage, you'll have to deal with a rather long list of questions about your income, your spending, your bills, credit cards, employment history, and other factors that lending institutions use to evaluate your ability to repay them should they loan you the money you need to buy a house.  The process seems quite invasive - because it is.  Just remember that you're pursuing a worthy goal, and that you need the help (and the money) of the financial institution to reach that goal.  

Banks and other lenders are actually required to follow rather strict rules to qualify new borrowers.  They look at your income, your current debts, and your ongoing expenses, and then decide if you will have enough money on an ongoing basis to pay the monthly payment associated with your mortgage.  

The end result you want at this point isn't a mortgage, though.  It's a "Pre-Approval Letter."  A "Pre-Approval Letter" is written on financial institution stationery, is signed by a suitable officer of the institution, and indicates the institution's willingness to loan you money in the form of a mortgage to buy a house.  

As part of the process, you'll learn how much the lending institution is willing to lend you, based on your income, debts, and financial situation.  When you add your down payment to that loan amount, you will have the upper limit on what you can spend on your new home.  (You can, of course, spend less!)  That's an essential number that will be a part of all the decisions you make once you start shopping. 

Similar, but less definitive is a "Pre-Qualification Letter."  It says that you appear to be qualified, but doesn't extend the institution's written declaration that your loan application will be approved. A "Pre-Approval Letter" is preferred - and often required. 

Many homeowners and real estate agents will require that you have a Pre-Approval Letter before they will consider showing you the home they have for sale.  Agents will usually ask for a copy of that letter for their files.  It's easy to understand the sellers' point of view.  There is no reason for a seller to open up their home for a buyer if the buyer can't get a mortgage.  Your Pre-Approval Letter reassures sellers that you are a qualified buyer, with the financial means to pay for a new house.  It's like a ticket to all of the listed properties you want to consider as prospects for your new home. 

Banks use relatively strict rules to establish whether you are financially qualified.  Once you've achieved that status, it's important that you maintain it until you've found your new home and obtained your mortgage.  That means you should avoid making any large credit purchases that will affect your credit rating.  It also means that you should hold onto the nest-egg you've set aside for your down payment, rather than using the money for other large purchases.  

There are many other aspects of budgeting and financing that enter into the purchase process.  

I can answer many of your questions, but just as importantly, I can help you find the financial experts and loan officers who can provide expert advise.  

Your Key Step - Budget & Financing:  

Find a financial specialist who can guide you through the loan process and get you a Pre-Approval Letter. 

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