However, I strongly disagree with the advice below. Prequalification is not the first step. Nor is it the second step. That's like--to use a wedding analogy--sending out the invitations before you have the church. Or even before you have the groom.
The first step probably should be to talk to one or more experience Realtors about the process of buying REOs. It can be a slow, frustrating, and unpredictable process. You might find your "dream" house, and lose it to another buyer...and never even have full confidence your offer was presented. (Check some of the other threads here on Trulia.) Or, more likely, consider that you're ignoring 95% of the homes on the market today. Maybe that little cottage with the white picket fence is out there, but it's not an REO. It's just a good deal, being sold conventionally. Why eliminate 95% of your options?
Before you found your fiance, did you say, "I'm only looking for left-handed lawyers" or "I'm only looking for a Libra." Of course not. So why limit your house search to REOs? And if you do, as I said, make sure you understand all the pitfalls of the process.
Second, narrow down the type of home you want. Before you got engaged, maybe you had some idea of the type of guy you wanted: athletic, good sense of humor, between 22 and 29, for instance. Well, do the same thing for a house.
The first step you should take in buying a home is determine what you want in the home. Make three lists: (1) What you absolutely must have; without it, you won't buy; (2) What you really want in a house; without it, you probably wouldn't buy; and (3) What you'd like in a house. Then set the third list aside. Focus on the first one, and see if you can move any of the items into List 2 or List 3.
Different people will rank their priorities differently. If you had 4 children, maybe 3 bedrooms and 2 baths is an absolute priority: List 1. Same scenario, but 4 bedrooms, 2.5 baths might be on List 2.
If you're planning on having children, maybe being in a good school district is an absolute priority: List 1. If not, then a good school district (if it makes your lists at all) would be List 3.
Now you analyze the list. Some of the same examples as above: Good school district if you plan on children. OK, but do you (or will you) earn enough to send your kids to private school? If so, then maybe the school district drops to List 2. Are you an advocate of home schooling? If so, again, perhaps List 2.
Fenced yard for dogs: If you have dogs, you might put that on List 1. Well, if it's not fenced, could it be? If you could fence the yard, then it's not really List 1. It'd be List 2 or List 3.
Affordability: You will not spend over $3,000 a month on PITI, even if you qualify for more, because you don't want to be "house rich, cash poor." That's List 1. But $3,000 still would be uncomfortable; you'd really like to spend no more than $2,700. That's List 2. And if you could spend less--say $2,500 a month--you'd be able to do some things you really love, like travel. That's List 3.
You go through all conceivable variables: Size of house. Condition. Location. Commute distance. Taxes. Climate. Affordability.
You should have a fairly short List 1, a longer List 2, and a longer List 3. This is your (or your family's) list of priorities.
Then you can contact a Realtor and a mortgage broker. A Realtor will help determine the price range for houses that meet the criteria on List 1. The mortgage broker will determine whether you can qualify for houses in the price range on List 1.
It makes no sense to contact a Realtor before you know what sort of house you're looking for (except to explain the advantages and disadvantages of REOs). So, your lists of priorities must come first.
Although it makes sense to contact the mortgage broker before the Realtor, both those steps must follow the development of your priority list.
So what happens if you develop the priority list, the mortgage broker determines what mortgage you'd qualify for, and then the Realtor delivers the bad news that you can't afford the properties on your list? First, you re-examine your list to make sure that all the items on List 1 really are absolutely essential. But if you've done this exercise properly, they probably are. You seek the mortgage broker's advice on what steps you'd have to take to qualify for the home that satisfies List 1. Maybe it's paying off some debt. Maybe it's staying at your job for another 10 months. Then weigh that advice. Can you do it? Do you want to do it? If it means living on pasta for the next year, maybe you decide that you'd rather continue renting.
Or you start thinking outside the box. Now, the mortgage broker may have had some suggestions, such as a co-signer or an equity share arrangement.
I'm out of space, but I hope you understand the order I'm suggesting you follow. And, just as important, why.