You are ready to buy a house. You did a preliminary search on the Internet and found an agent, but wait — before you even consider making an offer, you must find financing. It used to be that when someone found a home, they were pre-qualified and then pursued financing, but with the hot market happening in the Puget Sound area, pre-qualification just isn’t enough

The amount of money you can spend on a home depends on how large a monthly payment you can afford to make and the size of your down payment. An easy way to find out how much money you can afford is to ask a reputable Loan officer or “Mortgage Consultant” to begin the pre-qualification or pre-approval process.

A “Pre-qualification” typically occurs in the first conversation with your mortgage broker. This letter states that, given the preliminary financial information that you have provided the lender, you qualify for a loan of a given amount, at a given sales price at a given interest rate and program.

A “Pre-Approval” letter is even better. This letter states that you are actually approved for a loan of pending only an appraisal and clear title on the home of your choosing. Being “Pre-Approved” is the strongest negotiation position you can put yourself into when preparing to purchase a new home.

A pre-approved mortgage establishes exactly how much the bank is willing to loan you based on actual documentation and credit rather than a conversation. A pre-approved mortgage costs nothing with most lenders.

With a pre-approval, you know how much you can borrow. This saves you time by narrowing down the search for your dream home. Being pre-approved for a loan can greatly increase your advantage when competing with other buyers for the same property, which happens often in a hot real estate market. Your pre-approval serves as proof from a third party (the lender), that you are serious about your offer and qualified to follow through with the purchase. This can be a major consideration to a seller who is trying to decide which offer to accept.

How do you go about getting pre-approved, much less finding a loan? There are several ways to go about this process. Select a mortgage banker the same way you selected your real estate agent — ask around. Ask your friends about their experience with a mortgage lender, but most importantly, ask your agent. Real estate agents work with a lot of different lenders, and will be able to help you determine what type of a lender will work best for your situation.

Do you only have a little money saved for a down payment? Credit challenges from the past? Unable to document your down payment sources? These are all fairly common challenges with solutions of which you may not be aware. If you are currently experiencing any one or more of these challenges, it may be in your best interest to seek the advice of a knowledgeable loan officer who has access to these types of loan programs.

The lender will typically want to assess their risk on three things: Ability to repay the loan based on your documented income source and current expenses; the “ collateral” or the condition and market value of the home you are purchasing; and finally your credit or past history in paying your bills on time. Have your documentation ready for this initial meeting, at which the lender can give you a clearer picture of how much house you can afford and what type of interest rate for which you will qualify.

Think you can’t afford a home? Statistics show that one in four renters can qualify for a home mortgage loan. Since the 1950’s, FHLMC research shows that home ownership in the United States has climbed from 47 percent to almost 70 percent. Most people who rent really could own a home and you may not need as much money as you think. Owning a home could definitely be a possibility in your near future.

Next issue, I will discuss how to win the bidding war for the home that you want.

(Editor’s Note: J. Lennox Scott, is president of John L. Scott Real Estate. He may be reached at realnews@johnlscott.com, or visit his firm’s award-winning website at www.johnlscott.com.).