Many real estate agents insist that every purchase offer is accompanied by a loan pre-approval or pre-qualification letter. Unfortunately, these letters are virtually useless, because they carry very little weight. Generally, with these loan approval letters, the lender is saying that things look promising for offering a home loan, pending confirmation of the borrower's financial details.
So, what good are they? Simply put, a loan pre-approval letter proves that the borrower is serious about buying a home and has a good enough credit score to qualify for a home loan, and that's about it.
You can make your loan pre-approval letter mean more, though, and the letter can give the seller solid reasons to accept your offer. Or, your loan pre-approval letter can give the seller reasons to reject your offer. Which kind of impression do you want to make?
- A loan pre-approval letter is meant to demonstrate that you are serious about buying a home and have the means to do it.
- Pre-approval letters can make a difference in getting your home purchase offer accepted, but you have to avoid key mistakes.
- Be sure you submit a pre-approval letter for the exact amount of your offer from a known lender that clearly demonstrates your qualifications.
Common Loan Pre-approval Mistakes
The last thing you want to do is hand the seller ammunition to turn down your offer or encourage a counteroffer at a higher price. Here are common loan pre-approval mistakes that might discourage your seller.
Submitting a Loan Approval Letter From an Unknown Lender
Listing agents feel more comfortable if they know the lender who has prepared the loan approval letter. They might get antsy if the lender isn't a known quantity, because they don't know whether the lender will perform. There are some fly-by-night mortgage lenders in the business, and some make loans to borrowers that aren't in their best interests. They figure that by the time the borrower is ready to close, the borrower will have no option but to meet the new terms and conditions, but many borrowers instead walk away from closing.
Consider getting pre-approved for a qualified mortgage, which is a mortgage with stable features that minimize risk.
Look for a lender that has experience making loans in your area. Your real estate agent can make recommendations for lenders they've worked with, and family and friends can be a good resource as well. Many national lenders offer online mortgages, but consider whether you're comfortable with that or whether you'd prefer a lender with local, in-person representatives.
One major problem when working with online, national lenders is choosing a knowledgeable appraiser. National lenders might have no personal experience with the appraiser they pick and might hire an incompetent appraiser who can mess up the appraisal and blow the deal. If they've completed home loans in your area, though, they might have reliable appraisers to call on.
Submitting a Weak Pre-Qualification or Pre-approval Letter
Pre-qualification letters vary in wording, but some of them say that the mortgage broker or loan officer has received a loan application from the borrower. Period. They may or may not have reviewed a credit report. The letters may also state that there is no guarantee that the lender will make the loan.
A pre-approval letter, on the other hand, may indicate that the borrower's file has been submitted to underwriting and approved. It means that the borrower's credit has been reviewed and found to be acceptable, the borrower's employment has been verified, and the borrower's assets have been substantiated.
Lenders use the two terms somewhat interchangeably, so the most important thing is that the letter provides enough information for sellers to know that the home loan is likely to go through. The Consumer Financial Protection Bureau recommends talking with your real estate agent to determine whether your pre-qualification or pre-approval letter is strong enough.
Submitting a Loan Pre-approval Letter for More Than Your Offer Price
Work with your lender to ensure that your pre-approval letter reflects the amount you're willing to offer. A good lender will work with you to tailor your letter to your offer. If the pre-approval letter lets the seller know that you can pay more than the offer price, the seller will realize that you could pay more, and they may try to negotiate a higher price. The seller needs to know that a home buyer can afford the mortgage that the buyer is proposing in the purchase offer, and not a penny more.