First Get the Loan, Then Find the Home

Before you start shopping for a home, shop for the loan to buy it.

Mortgage bankers or bank-loan officers will tell you - no charge - how much you can afford to spend on a home. They'll even approve the loan ahead of time.

One rule of thumb says you can qualify for three times your pre-tax income, "assuming you have no outrageous debt," says David Black of 1st New England Mortgage, in Wellesley, Mass.

Lenders offer two options.

Just sitting down and talking to a mortgage lender about your finances usually results in prequalification. The lender may also order a credit report to get your credit "score."

The result is a ballpark figure for the size mortgage the lender would make.

Preapproval is more formal and time consuming - and more helpful. The bank will verify your employment, income, and assets, and pull a detailed credit report.

The result is outright approval for any loan up to a certain amount - $150,000, for example. The approval generally lasts 30 days. More important, it adds to your negotiating strength when you're ready to make an offer.

Arthur and Christine Kotsifas found out the hard way about the value of preapproval.

They searched for three months for a house in Arlington, Mass., near Boston, before they finally found one they liked. Although they were prequalified for a mortgage, the seller rejected their offer in favor of a buyer with preapproval.

"Getting preapproved is almost as good as having cash," says Mr. Black. Without it, the seller may feel some risk in taking her house off the market while you take about a week to get a loan.

But be prepared for paperwork: three months of statements from your bank and investment accounts - including IRAs - plus a recent pay stub and statements from all your credit-card vendors.

The biggest factor in how much you pay for the house, though, isn't the purchase price. It's the mortgage rate.

On a 30-year $150,000 mortgage, saving a quarter of a percentage point shaves off almost $10,000 over the life of the loan.

So find a mortgage banker who offers the best interest rate available.

One option is a mortgage with no points or closing costs. They carry higher rates than other mortgages. But since closing costs amount to thousands of dollars, consider avoiding them if you plan to sell the house in a few years.

As a rule, each point - worth about 1 percent of the loan amount - cuts the interest rate a quarter of a percentage point. So one point on that $150,000 mortgage would cost $1,500 and lower the interest rate from, say 7 percent to 6.75 percent. You'd save $9,000 over the 30 years.

Lenders offer four basic types of mortgages: 15- and 30-year fixed-rate loans, and 15- and 30-year adjustable-rate mortgages (ARMs). As their name implies, fixed rate mortgages lock in one rate for the duration of the note. Generally, 15-year loans carry lower rates than 30-year loans.

ARMs offer a lower introductory rate than fixed-rate loans, then allow the rate to adjust to market values, usually after one, three, five or more years. The rate could go even lower, but beware: That's unlikely with today's historically low mortgage rates. ARMs are enticing for first-time buyers who plan to stay in the house only a few years.

In Chicago this week, for example, 30-year fixed-rate mortgages averaged 7 percent, while one-year ARMs were 5.797 percent.

Whether to pay points or closing costs, get an adjustable or a fixed-rate mortgage "depends on your personal assumption about where interest rates are headed," Black says.

If you think rates have bottomed, you may want to buy down the rate - pay extra points - and lock it in.

The mortgage banker will also help you figure the size of a down payment. As it gets larger, your interest rate may fall, and you may avoid mortgage-insurance costs.

For first-time buyers, Black says, "we try to get as close to 10 percent as we can." But banks often offer special deals to first-time buyers, requiring as little as 5 percent down plus any points and closing costs.

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