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Not all pre-approvals are the same! Everything you need to know about this important document!
We’ve talked about it before in different blog posts- when a seller accepts your offer, they are taking a chance on you. Changing their listing to “Contingent” will virtually end all further interest from buyers, and put a stop to showings. They are not likely to receive any other offers, which means that they have a vested interest in getting to the finish line with you, to close on time, and to avoid any roadblocks on the way.
Here are some examples of ways that starting over after a failed transaction can cost the seller money:
- Additional taxes
- Additional condo fees
- Utility costs
- Insurance
- Interest payments on their mortgage
- Maintenance costs
Another important factor to consider is that once a property has been on the market for more than a week or two (at least in this current market), the perception that future buyers will have of the listing can be impacted, meaning that it may be difficult to generate the type of enthusiasm and energy from the market that a seller saw when their home first went for sale. The competition, high offers, and favorable terms may be harder to come by the second time around, and this could end up costing the seller thousands in the long run.
For these, and other reasons, sellers and their agents place a high importance on evidence that buyers have the financial strength and ability to pay for the home, should their offer be accepted. We already covered proof of funds in another blog post, which is important for offers that do not contain a financing contingency. In cases where a buyer intends to obtain a mortgage to purchase a property, a letter of pre-approval is the document we use to give sellers the confidence they need to move forward with our offer.
A letter of pre-approval is provided by a mortgage lender as evidence that the buyer has applied for pre-approval and met the basic criteria for loan approval. It means that the buyer is highly likely to be approved for the loan needed to purchase the property in question. Not all pre-approval letters are equal, and part of our goal with today’s blog post is to highlight the differences and help buyers make good decisions. Ultimately, if a pre-approval helps a buyer meet their goal (getting their offer accepted), then it’s done its job. Many of the differences that we will discuss below matter only inasmuch as they impact a seller’s perception of certainty that the buyer will be ultimately approved for the loan they need. For this reason, we will examine a pre-approval letter from the seller’s perspective, thus giving us a better understanding of the qualities sellers will prefer or reject. Keep in mind that even if sellers themselves are not savvy to many of these finer points, their Realtor will almost certainly encourage to consider all the subtle details, especially when comparing your offer to those of competing buyers.
The first and perhaps most important thing seller will look at is the lender that you chose to work with. Perceptions of different types of lenders will impact the value sellers will place on your pre-approval. Here are some examples of different lender categories, along with common perceptions in the industry. There are plenty of examples to the contrary, but as they say, “Perception is Reality”:
- Online lender: Easy to obtain a pre-approval, as they don’t do much work to verify assertions made in their online applications before issuing pre-approvals. Difficult to work with, because they are not locally based, may not know or understand how business is done in our state.
- Big bank lender: More solid in terms of verification, but notoriously difficult to work with, not flexible, and don’t place importance on your deadlines, just move at their own pace. If any challenges arrive in the process, not creative or dedicated to finding a solution and moving forward. Unavailable on non-banking days.
- Credit unions: Reasonably solid. Generally good service and decent communication. Not available during non-office hours either.
- Mortgage broker with local representatives: Some are better than others, but the more well-known brokerages have a reputation for understanding how things are done locally, and their pre-approvals are reasonably solid. Many of these mortgage representatives have a relationship with local Realtors, and are generally more available in “off-hours”, which can be very important if issues arise that require immediate attention and you can’t wait over the weekend for a solution.
The next thing a seller will look at will be the terms of your pre-approval. Here are the general things that a seller will look at:
- Loan amount: Not all letters will state this in the same way, but generally a pre-approval will state how much the buyer is approved to borrow vs the purchase price. Another way of looking at this is “how much of a down payment does the buyer have to make”? The larger the down payment needed, the more you may want to consider also providing proof of funds for that down-payment. Just because you have a pre-approval letter for a loan of $1M doesn’t give the seller confidence that you have $200k in cash to make your down payment. Again, anything we can do to give the seller confidence is usually worth the effort.
- Interest rate: Some sellers will pay attention to this, assuming that buyers who have a high interest rate did not have the financial strength to be approved for a lower rate
- The type of loan: Some sellers will pay close attention to whether a buyer is using FHA, Conventional, VA, or other loan programs. For example, many condos will not qualify for FHA lending.
- The expiration date: Most pre-approval letters are good for about 3 months. Naturally, the seller will want to know that your letter is current.
- Who is listed on the letter: If there is one name on the pre-approval, but two names on the offer documents, or vice versa, it can raise questions with the seller. This is not necessarily a problem per se, but it’s generally best to get out in front of this by offering explanation to the listing agent at the time of your offer.
Finally, it’s worth mentioning that some lenders will offer a fully underwritten pre-approval letter. This is a potential game-changer for home buyers and we highly encourage you to ask your lender if this is something they can provide.
Traditionally, once your offer is accepted, the lender will initiate two separate processes: underwriting and appraisal. We talk about appraisals in a separate blog post- this is just the lender confirming that the property being purchased is of sufficient value to serve as collateral for the loan. Underwriting is the official process where you apply for the loan itself. Once approved, you’re issued loan commitment. With a fully-underwritten pre-approval, this process is done in advance, meaning that your finances have been fully reviewed and you’re approved for the loan. This is essentially like writing a cash offer, since the seller is already assured that your financing is secured, and you can feel confident to write an offer waiving the financing contingency.
A pre-approval letter is an important part of your offer packet when buying real estate, and we hope that this article helps you to make good clear decisions when preparing to write an offer! As always, if you have any questions about pre-approval letters, or ANYTHING about real estate, we’d love to hear from you! Give us a call!
