"Is the buyer pre-qualified or pre-approved through their lender? " - Suggested question by Ron Minearo
Lender answer: This is a critical question to ask to determine the buyer's capacity to perform his/her end of the purchase contract. There is a BIG difference between "Pre-Qualification" and "Pre-Approval".
A Pre-qualification is based upon a copy of the buyer's credit report and oral statements from the buyer to the lender about his or her income, employment, and assets. Nothing has been verified.
A Pre-Approval means an Underwriter has reviewed and approved ALL of the buyer's required documents for loan approval except the subject property appraisal, title work, and any required inspections.
Only an underwriter has the authority to commit a lender to fund a loan. Mortgage brokers, bank mortgage sales reps, and lender sales reps do not have the authority to issue a Pre-Approval.
It is not uncommon for Pre-Qualifications to fall apart in underwriting once the buyer supplies his/her income and asset documentation. This is especially true of Pre-Qualifications obtained from a lender's web site or via a telephone interview with a mortgage sales rep. There are many rules regarding qualifying income and assets. For example, a buyer may state that he or she earns $5,000 a month, but if a portion of that income is from overtime or commissions that cannot be documented as part of the buyer's earnings for the past two years, that portion of the income does not count towards the buyer's qualifying income. A buyer may state that he or she has $25,000 in a 401(k) retirement plan, but only 75% (60% for Government loans) of the VESTED portion may be used for qualifying.
I have seen many Pre-Qualifications prepared by well-known banks and national lenders that are virtually worthless due to the difference between the buyer's oral statements and the actual qualifying dopcumentation. To be sure of a viable buyer, your Realtor is correct to insist on a Pre-Approval from the buyer's lender.
It's a GREAT question to ask - and important to a smooth, trouble-free closing.