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Why you need pre-approval letter

By Trulia | Published: Oct 14, 2009 | 21 Comments

"Trust but verify" was a popular expression in the Cold War, conveying the need to hold nations true to claims about their own nuclear arsenals. The same principle applies to you as a home buyer when you make claims about your ability to buy. To verify your status, you need a pre-approval letter.

A pre-approval letter verifies your ability to purchase a property. It is based on several factors including your credit score, job and employment history, current income, bank references, and the ability to fund your down payment. It does not specify numbers for each item, however. After all, you wouldn't want to advertise your bank account numbers or credit score to every seller or broker you encounter. But the letter verifies that a responsible lender has taken a good look into each area and drawn a conclusion about your home-buying ability.

Apply for a pre-approval letter and your lender will tell you exactly what information is needed. But a few items are certain to appear on the list, including:

  • Two years of tax returns complete with the W-2 forms verifying your income.

  • Your most recent pay stub, showing you're still employed.

  • At least two recent bank statements.

  • Verification of other sources of ongoing income such as alimony, child support, or a second job.

  • You'll also need a signed authorization for the lender to order your credit report, although for this, the bank will make it easy with a form for you to sign.

If you're applying online, you can expect to submit these items by fax. If you're visiting a lender in person, you'll save time by arriving with these items in tow. If the property purchase will be a joint affair (say among a husband and wife), you will obviously want documentation for both parties.

Obtaining a pre-approval letter may be instantaneous (particularly online), or it may take up to 48 hours, depending on bank bureaucracy.

Sellers and their agents see prospective buyers as faces on a totem pole.

At the bottom of the pole are those who make no attempt to establish their home-buying credentials. For them, home-shopping is kind of a sport. Brokers try to usher them out the door with just a handshake and a brochure.

A notch higher is where you'll find the pre-qualification crowd. The holders of "pre-qual" letters have at least walked into a bank or gone online and answered a few questions about their financial situation. But such letters require basically no verification. The idea is akin to the stated income mortgages of a few years ago, when false claims about their income and assets actually got a certain number of people into undeserved financing, called "liar loans."

Highest on the totem pole, where you should aim to be, is the pre-approval position. Here your assets, income, and debts are actually verified by the lender. But even a pre-approval letter is not binding. It is not a mortgage commitment or guarantee of credit. Banks know your situation might change between now and closing time.

Yet another reason for a pre-approval letter is that real estate agents have a sixth sense about who the serious buyers are. Some agents, in fact, won't deal with you at all without pre-approval. A pre-approval letter gives you leverage when negotiating with sellers. You as well will feel more confident knowing what you can borrow and buy.

The letter can be written in one of two ways. It can state the maximum purchase price you can afford, addressed "To Whom It May Concern." Or it can be addressed to a specific seller or his agent, stating your qualifications to pay a specific amount for the home. The latter approach is more personal and often more powerful, if it works. The former, clearly, is more useful in differing situations.

Comments

By Mario Blautzik,  Mon Nov 16 2009, 04:19
Great Article. I do not know any listing agents in our market that entertains offers without a pre-approval letter. Plus, the buyer needs to know and prepare for the costs of this big investment.
By Bruce Bills,  Tue Dec 8 2009, 09:20
Very good article. Just an FYI comment. Many lenders already require an appraisal to be submitted along with all other documentation before they will underwrite a loan, let alone issue a pre-approval letter. In other words, they aren't underwriting TBD property files. With home value such a big questionmark in many markets, many lenders just don't want to spend the time underwriting a file that may get harpooned by a property that won't appraise at the value the borrower or seller believes it should.
By Javier Rodriguez,  Sun Jan 31 2010, 14:26
Very informative article. I recommend to all my clients BEFORE they begin to look at properties to get prequalified. After I gather the standard information listed in the article (tax returns, paystubs, bank statements...etc) I meet with the clients. In the meeting I tell them the max sale price of a home they would be approved for. In addition, I go over what their monthly mortgage payment and amount of down payment required for different sale prices of homes. I do this so they have an idea what the numbers would look like for a sale price of a home. That way, they can discuss what range of a sale price of a home they feel comfortable with looking at. Lastly, I give them a copy of a prequalification letter that I prepare that goes over their max preapproved sale price of a home they can purchase, their credit score, and what program they are approved for so the seller/realtor knows they are a serious buyer. In todays market, a preapproval letter often may be required to make an offer. For more information feel free to go to my company website at http://www.leonmortgage.com
By Jerry Sachs,  Thu Feb 18 2010, 22:51
An excellent article and very good advice. Pre-Approval is the Key. It tells a seller that you have already taken the steps and made the serious effort to obtain a commitment for the funds to CLOSE THE TRANSACTION. An important practice in which I strongly believe is mentioned in the last paragraph. I will provide you a specific letter for each offer you make, tailored to that offer. You don't want to make an offer of $180,000 on a house listed at $220,000 and show the seller a pre-approval letter for $200,000. They will want to negotiate a much higher sales price than your offer. Even if you qualify for the $200,000, I will write the pre-approval letter showing "Mr. & Mrs. Smith can purchase a home for $180,000 as they have $36,000 available for the down payment and have been fully pre-approved for a mortgage in the amount of $144,000." In other words, I'M ON YOUR TEAM. It would be my pleasure to help you. Visit my website at http://www.jsachs.primelending.com
By Home Buyer Help,  Fri Mar 12 2010, 08:28
When I was in the lending business (which I am not any longer) I always stressed the importance of a pre-approval letter. There is a big difference between getting a pre-approved and a pre-qualified.

A loan officer can pre-qualify a buyer in just a few minutes. However to get a buyer pre-approved by an underwriter, well that is where the work begins. As commented on already, documentation, VOI, VOR and many other things necessary to the approval process can be done ahead of time.

Then the borrower can be given a written approval letter by the underwriter which I always told them is like having cash in your hand. It makes the purchase process easier for all parties.

Feel free to check out this article http://www.first-time-home-buyer-solutions.com/meeting-with-a-mortgage-professional.html

Jeff
By Justin W. Richards,  Mon Aug 2 2010, 14:38
Great article! I like the reference to the "faces on a totem pole". This is so true. As a listing agent who works more often than not with distressed sellers (e.g. short sales), I do look at buyers very much the same way. If they, or their agent, can't and won't take the time to get qualified to purchase a home then they are most likely not the right candidate for my Seller(s).

It goes a long way as a buyer to find out just where you stand as a buyer not only from a budget stand point but also as it relates to your time. Time and effort are expensive when it comes to buying real estate. That goes not only for you as a consumer but also for those whom you choose to do business with.

Justin W. Richards
Asset Realty Group - Kirkland
PremierTeam@AssetRealtyGroup.com
425.765.8088 | 206.953.8186

BE SURE TO VISIT OUR WEBSITE - http://www.BellevueShortSaleExperts.com
By Sunny,  Sat Sep 11 2010, 17:44
am looking followed to here form you
By Christopher Sawyer,  Sun Sep 12 2010, 11:53
Does this even really matter if you've done the pre-app through the buying agent or faxed over a pre-qual/pre-approval to your BA?

My buying agent happens to be one of my friends and she's been listing and representing buyers forever, plus anybody who claims to be a reputable listing agent has encountered her.

Maybe this is necessary if you're moving to a foreign place you've never been to before, but if you're established or at least your buying agent is--why sweat it?


Besides, sellers are desperate. I see a lot o listings with "motivated sellers" but only want to come down in price by 1K-5K and have listings up over 180+ days. If anything, the seller should be more flexive, not the buyer.
By Christopher Sawyer,  Sun Sep 12 2010, 12:03
My buying agent also recommended to me that you need to get your pre-approval letter spelling out the MAXIMUM amount the lender is willing to lend for---not your STATED mount you are wanting to borrow for. If you're only looking at $300K but qualify for $450K, make sure the letter says $450K.

She says that sellers and listing agents fall all over themselves if they see a buyer who is pre-qual'd for way higher than the listing---thinking that the buyer will say YES immediately and is not likely to low-ball the seller with an offer under the list.

Since they think that you're going to agree to the list price straight away, they are great at returning calls to the BA and will be more than willing to wait longer to hear back from your buying agent, so there is plenty of time for your agent to determine what kind of buyer interest there is for the property, investigate the seller and also get comps around the seller's house so you know ahead of time what the house will appraise for.

If the comps come in low and you know what kind of situation the seller is in, that's when you can slap them upside the head with an offer well under list.
By William Chu,  Fri Oct 8 2010, 18:42
After receiving a pre-approval letter, do you call the mortgage broker/lender to confirm your perception of the strength of it?
By Sergio Caceres,  Sat Jul 16 2011, 06:54
If the pre approval letter is from an unknown source, I always call to to confirm the validity and strength of it's contents. Some pre approval letters aren't worth the ink and paper that contains them. This confirmation is the diference between wasting time and closing. The last thing you want to see is the disappointed faces of your buyers because they can't buy the home they fell in love with after all those wasted months looking for it.
By Voices Member,  Sun Jul 17 2011, 20:40
Good article. Very important for homebuyers to present as much documentation when looking to become pre-approved for a mortgage. Lenders are more cautious these days, so it is important to address all determining factors from the very start. This way the pre-approval letter holds value when it is presented to a Realtor.
By Kevin Cotterill,  Thu Nov 3 2011, 15:26
I cannot emphasize enough the importance of buyers having a solid pre-approval letter in today's market. Many buyers think that with the high amount of foreclosures and troubled properties that we are in a "buyer's market", but that is not the case. A well-priced property will usually attract more than one offer, so this means the seller and their agent will evaluate the offers by not only the price but also many of the following: 1) requested concessions; 2) type of financing; 3) strength of PA letter/reputation of bank or mortgage company issuing letter; 4) down payment; 5) contingencies (such as the need to sell a house before the buyer can close the deal); and how long it will take to close.

Just as a stage play doesn't open until there is a dress rehearsal, a seller will not open their evaluation of your offer until they believe you have gone through the whole story (and its written "script" via income, credit and savings)with a lender.
By Dave,  Mon Nov 14 2011, 22:09
Pre-approvals can mean a number of different things, often depending on who is giving the pre-approval. Many lenders will simply write the letter and hope to land a deal in the future only depending on initial information gathered by the loan officer.

I find a solid pre-approval has gone through DU (Desktop Underwriting) or LP (Loan Prospector.) We are happy to run our deals through these to guarantee our buyers and hard working Realtors they in fact have a deal before wasting valuable time and energy to find they really can not be approved for what was stated.

If you are looking for a pre-approval in Utah, I would be happy to have my team put it together for you.

David Bath
W.J. Bradley Mortgage Capital Corp.
david.bath@wjbradley.com
801-432-0218

http://mywjb.com/david-bath/apply-today/
By Matie,  Tue Jul 17 2012, 07:06
Just as a stage play doesn't open until there is a dress rehearsal, a seller will not open their evaluation of your offer until they believe you have gone through the whole story (and its written "script" via income, credit and savings)with a lender.

Totaly agree!

http://www.indexpost.com/
By Auto_gm,  Wed Jul 18 2012, 03:17
Pre Approval letter is just a sanction which brokers and agents require so they dont waste their time dealing with people who cant buy because they dont get paid unless a transaction takes place.

Basically they dont want to get stroked...
By Jarodgrob,  Fri Aug 24 2012, 19:58
for realtors to know you are qualified for a loan

jarod grob
By Valen Smith,  Sun Feb 17 2013, 23:07
Pre-Approval is good but an Full Approval would be better. Most lenders can do a Pre-Approval by simply noting your income, debts, and estimate or actual credit score. Likewise, the same amount of time to Pre-Approve you, most lenders can do an Automated Approval within 20-30 minutes and have it underwritten within 24-48 hours; at that point you can be provided a Commitment Letter when making an offer to purchase.
Valen from http://BritainLoans.co.uk/
By seoquist,  Thu Sep 19 2013, 22:26
For the Pre-Approval or Full Approval process, do both parties need to be present? I am currently living overseas and my wife is living in the US. Can she get pre approved without me being with her?
By John Veenstra,  Thu Oct 24 2013, 07:12
Since 1983 I have done only pre-qualifications and I have never had one problem doing so. I can do a pre-qualification in an hour or less. I get the income and asset information from the Buyer, get a credit report and issue the pre-qualifcation letter for the exact amount of the offer being made.
It was mentioned above that sellers are happy when they see a letter stating someone is qualified for much more than they are offerring.
I have a different opinion. I do not think it advisable in the negotition process to offer a seller $200,000 and at the same time show them a pre-approval for $300,000. The seller knows he can counteroffer up to $300,000. I prefer to issue a pre-qualifcation letter for $200,000 and then issue another one in five minutes for the exact amount of any counter offers and/or final offer.
There is nothing wrong with doing a pre-approval and it could be useful in a limited number of circumstances for some questionable income or asset or credit situation. In that case, I just call the underwriter and ask what will bo ok and what will not.
On the spot pre-qualifcations in an hour or less are as good as the Loan Officer who does them. Best I can say is that I am very good at it.
I can do the pre-approval and collect documents and process them through the underwriter. I just choose not to do so. I get tax returns for self employed and review them myself if any questions as to how income will be calculated.
Pre-apporvals are not good forever. By the time someone buys a house, the income and asset and credit documents have to be updated. If any changes, the pre-approval is no longer valid.
By Gary Papirov,  Thu Apr 17 2014, 07:36
A pre-approval is something of a commitment for both sides. First, you agree to a loan. Then you give the broker or lender a check to cover the cost of a credit report search and analysis. The lender may ask for other information such as your last two or three bank statements and pay stubs. Once the credit report is back, the lender should be able to provide you with a loan rate, the APR, lock the loan in for you if you wish, and provide you with a truth-in-lending closing statement which will outline the costs of your loan and what size check you will need to bring to closing. As quick as on-line applications are, the pre-approval loan package still takes about four days to receive. The lender will overnight it to you in most cases.

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