Loan Pre-Approval vs. Pre-Qualify

There are a number of advantages to be preapproved for a loan than to be mearly prequalified.    When the lender hands a borrower a preapproval letter, it means the borrower can:

• save time by looking at the right homes
• avoid falling in love with a home you can’t afford
• increase bargaining leverage
• shorten closing time period required

Loan Pre-Approval Is Critical

You should avoid making offers on homes with the intention of getting a loan later. You might be surprised by errors in your credit report and with the problems in the home loan industry, you just don’t know if securing a loan is a sure thing anymore.   Many real estate agents require that a purchase offer is accompanied by a loan approval letter before they will submit the offer to the seller.  To avoid problems, get pre-approved in writing before you do any home shopping. This will lock down your financing and remove any issues surrounding funding a purchase once you find the perfect home.  But there are a few precautions you should take too.

Intent but not Guarantee

Loan preapproval shows intent but not a promise.  Unfortunately, loan approval letters are virtually useless because they carry very little weight. Generally, the lenders do not guarantee they will make the borrower a loan. So what good are they?  Simply put, a loan approval letter proves the borrower has applied for a loan and, hopefully, is serious about buying a home, and that’s about it.

Carries Influence

The seller can be influenced by your letter since it does mean that you’ve begun the process of working with a lender and you have the intention of completing the process.  You can make your loan approval letter mean more than you have applied for a loan, and the letter can give the seller solid reasons to accept your offer. Or, your loan approval letter can give the seller reasons to reject your offer.

Problems with Approval Letters

Did you know your loan approval letter can give the seller reasons to reject your offer? If you do not want to hand the seller plenty of ammunition to turn down your offer or encourage a higer counter offer, then be aware of these mistakes:

3 Common Loan Approval Mistakes

• Loan Approval Letter From an Out of Area Lender.Real estate agents are comfortable if they know the lender who has prepared the loan approval letter.  Most agents in an area are familiar at least by reputation with most lenders in their area.  They get antsy if the lender isn’t local because they don’t know if the lender will perform.There are a lot of fly-by-night mortgage lenders in business, and some make outrageous promises to borrowers that they never intend to keep. It’s a way of hooking in a customer and building a relationship that a borrow stays with even when it’s not in their best interest.  They figure by the time the borrower is ready to close, the borrower will have no option but to meet their new terms and conditions, but some borrowers instead walk away from closing.  It’s dramatic and heartbreaking for many, much like leaving someone at the altar, but sometimes it’s the best consumer choice.It puts a home buyer at an extreme disadvantage to submit a non-local lender approval letter. If home buyers encounter difficulties with the loan, it’s not like they can lean across a desk and grab their mortgage broker’s throat. Instead, they must glare at their monitor and furiously pound the keyboard or continually push redial on their cellphone.A major problem is choosing a knowledgeable appraiser. Out-of-area lenders generally have no personal experience with an appraiser they pluck out of the phone book and may hire an incompetent appraiser who can mess up theappraisal and blow the deal. As in any industry, a company or individuals reputation is important, but an out-of-area lender may not be in tune with local reputations.
• Pre-Qualification Letter Instead of a Preapproval Letter.Prequalification letters vary , but most of them say 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 also state there is no guarantee that the lender will make the loan.A preapproval letter carries more weight because it states  that the borrower’s file has been submitted to underwriting and approved.  It means 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.  So, while the lender has not gauranteed  to give the loan,  the borrower has at least been scrutinized and found deserving of a loan.Submitting a preapproval letter means the borrower is fully qualified to purchase the home, subject only to an appraisal and title work.
• Loan Approval Letter for More Than Your Offer Price.The seller needs to know that a home buyer can afford the mortgage that the buyer is proposing to obtain in the purchase offer, and not a penny more.  If you submit a letter for more than the offer it’s like waving  a flag in the seller’s face that says, “Look at me. I can pay more than my offer price.” That’s how sellers interpret a loan approval letter in excess of the purchase offer. They are not impressed that the borrower is qualified for a higher loan amount because they immediately want to put some of that money into their own pocket.