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Getting pre-approved

Once you've figured out how much home you think you can afford (see How Much House Can You Afford?), it's time to talk to the banks. You need to know how much a mortgage company will loan you before you start shopping.

One option is to get pre-qualified for a loan. To do that, you give your basic financial info to a lender, who then does a quick calculation to give you a rough estimate of how much you can afford to spend on a house. Bear in mind that the bank isn't actually agreeing to loan you this amount; they're simply saying, "We think you can afford this much house—we'll work out the exact numbers later."

You're usually better off getting pre-approved for a loan instead. Pre-approval is more formal than pre-qualifying, and it takes days instead of minutes. The lender will pull your credit report, review your financial info, and check your employment history before giving you a pre-approval letter. This process may actually cost you money, but pre-approval gives you the confidence that you can actually afford the homes you're looking at, and gives sellers confidence that you'll be able to get a loan.

Note

Neither pre-qualification nor pre-approval is binding on you or the lender. If you buy a house, you're not required to use the bank you talked to, and they're not required to lend you money (but if you're pre-approved, they probably will).

Be careful: Even after the recent mortgage crisis, lenders can and do approve loans for more than people should borrow. Run the numbers yourself and be willing to put on the brakes. Don't spend $500,000 on a house just because a bank will lend you that much.

Making a list

While you're waiting for the pre-approval process to finish, put all your hopes and dreams down on paper. Having a list of wants and needs can help you avoid making an emotional buying decision.

First, list all the things your family wants in a house. This is a time to brainstorm, not be judgmental. Your aim here is to make a list of features in your ideal home. Do you want a laundry room? A large garage? A yard for the kids to play in? And what sort of neighborhood are you looking for?

Once you've made your list, prioritize it. Sort the things you want from most important to least important based on your family's goals. What makes you happy? Maybe you love to spend time outdoors gardening and entertaining, so a big yard is a necessity. But if your family spends a lot of time together watching TV, the size of the family room might be more important.

This list will help ground you when you think you've found the "perfect" house: It can remind you that you need a laundry room, and that you swore you didn't want a place where you'd have to remove asbestos ceiling tiles. As you search for homes, update your list as you discover new wants and needs.

On The Money: Does Size Matter?

A book on smart money management isn't the place to tell you what to look for when choosing a home. (So check out other great books on this subject, like Buying a Home: The Missing Manual.) But some parts of the decision can have a big impact on your bottom line. One of these is home size.

According to the U.S. Census Bureau, the average new home was 2,349 square feet in 2004, up from 1,695 square feet in 1974. During those 30 years, kitchen sizes doubled, ceilings rose more than a foot, and bedrooms grew by more than 50 square feet. But home sizes are ballooning even while our families are getting smaller: The average family had 3.1 people in 1974; it had shrunk to 2.6 people in 2004. (For the stats geeks out there, that means we've gone from having 547 square feet of home space per person to 903 square feet per person.)

But bigger isn't always better. The larger your house, the more it costs to buy, maintain, heat, light, paint, furnish, and repair. That's not to say you should live in a shack, but as you shop for a house, remember that size comes with a price. If you need the space, buy it. If you don't, you're better