Ask the Expert

Home prices have been rising fast. Should I apply for a preapproval that’s more than I think I need?

There’s no question we’re in a hot market right now that shows few signs of cooling off. However, the fundamental rule still applies when it comes to getting a mortgage: Stay within budget.

The more prep work you do ahead of time, the better. This serves the dual purpose of helping you move quickly when needed, as well as acting with a cool head. Before you even start looking at homes, figure out your finances and calculate how much you can and want to spend on a mortgage. Remember to factor in insurance, taxes, and a rainy day fund for repairs.

Then you’ll apply for your preapproval. This is the bank’s letter attesting to how much you can afford.

A quick note about preapproval versus prequalification letters: The prequalification is typically based upon self-reported information, while the preapproval involves the bank checking your credit score and verifying bank and income records. Although some institutions may use the terms interchangeably, the preapproval generally carries more weight — and in a hot market, this can give you an edge when making offers. Remember that neither is final, however. Your loan will go through a final round of verifications and include an appraisal and inspection before it becomes official.

Back to how much you should apply for. A common rule of thumb says to keep your mortgage payment — including principal, interest, taxes, and insurance — at or below 28 percent of your gross monthly income, and your total debt service below 36 percent.

When you stick to this formula, you make things easy on yourself. Now you’ve got a definitive number in mind, and you can shop for houses that fit your budget rather than the other way around.