1)   Determine what you can afford:  You need to think about several expenses when buying a house: the down payment, closing costs, moving costs, the mortgage, insurance, taxes, etc. Therefore, you need a good sense of how much cash you have to spare for the initial costs (without completely depleting your emergency savings) and the income you need to sustain the ongoing expenses.

I actually found online calculators like the ones on CNN Money, Bankrate, and MSN Money very helpful.  Most of them say you can afford to spend up to 28% of your monthly gross income on the mortgage, taxes, insurance, and association dues (if applicable), making sure not to go over 33% of your monthly gross income on total debt repayment (i.e., taking into account the total payment of your housing, student loans, car loans, etc).

You should keep in mind, though, that just because you can afford something doesn’t necessarily mean you should buy it. Already having a well-established budget will allow you to easily determine a realistic spending plan.  Both and Ben and I agree that we don’t need to spend anywhere near what we can afford to live comfortably.  And I’ve played with our budget to figure out how much we can increase our housing payments without disturbing that comfort.

2)   Get Pre-Approval: most of us will need a mortgage to purchase a property. So the next important step involves getting pre-approval for a loan. This step will let sellers know you are serious and give you the ability to act on a place you really want.

The two main considerations in the pre-approval process are your income and your credit. We got a lender referral from our friend and pretty quickly had to get together the last two months of pay stubs, the last two years of tax returns, including W2s, and our most recent bank statements showing the cash we had on hand for a down payment. We also had to go through an interview with the broker before we got the pre-approval letter. 

Despite getting pre-approved at a good interest rate, our friend suggested we use this rate as a baseline to shop other lenders for better rates.  Because Ben teaches, he gets some special incentives and access to the Teacher’s Credit Union that we can hopefully take advantage of.  But overall, I can’t imagine a more important scenario when comparison shopping could save you thousands of dollars over the life of the loan.

3)   Start Looking: Let the fun begin! Now that we have a sense of what we can afford and have the approval for a loan, we can start looking at places. For our situation, we may not have to look very far. We love our current place and have reached out to our landlord about purchasing it.

Even still, we will look at what else is out there. Our friend has started sending us listings. And I’ve been living on Redfin. We also have other friends that have been actively searching and sending us listings as well.