Pre-Approval Letters: “Are you a ‘SERIOUS’ real estate buyer?”
June 10th, 2007 by Mark FlandersThe Kitsap County real estate market in particular, and the Washington real estate market in general are getting better for real estate buyers and tougher for real estate sellers. There are a variety of reasons for this and it is nothing unusual. The real estate market goes up and the real estate market goes down. It’s the nature of any market to move in both directions over time.
Falling mortgage interest rates in the past few years have allowed real estate values to rise significantly. As prices have risen, the number of potential real estate buyers have diminished. This is due in part to the fact that some families simply do not qualify for the higher priced properties. AND, as the number of qualified buyers dwindles, real estate that is listed for sale, sits on the market for longer and longer periods of time, waiting to sell.
This dynamic allows real estate buyers to get more aggressive with their negotiations. Good for the buyer; hard on the seller. Real estate sellers, faced with the prospect of receiving less money for their home or investment property, naturally want to know that the potential buyer can actually purchase. Rich’s article on the subject of Earnest Money, addresses one of the tactics for proving a buyer is serious about buying. This article addresses a way to prove a buyer can purchase.
Improve the odds of getting your offer accepted with a Pre-Approval Letter.
Your chance of being viewed as a Serious Buyer skyrockets when the seller and the Listing Agent are presented with tangible proof that you, as a buyer, prepared for this transaction in advance. The Pre-Approval letter indicates that you have taken the time to sit with a mortgage professional, discuss the details of your financial situation, applied with a Lender and been approved by that Lender, before looking at homes.
Pre-approval and pre-qualification are two entirely different processes.
Pre-approval is (in theory at least) much stronger. The pre-qualification process entails meeting with a mortgage professional and discussing your financial situation to determine:
- how much you can borrow
- how much you want to borrow
- what kind of roadblocks may need to be addressed
- what kinds of loan programs are availabe
- current interest rates
- what the loan will cost you
This is all valuable information needed by any prospective real estate buyer. But, it is not meant to prove that you can purchase. This meeting is a starting point for borrowers. Savvy real estate sellers and their Listing Agents are well aware of the difference between a pre-qualification and a pre-approval. Pre-qualification indicates some organizational skills on the buyer’s part. Pre-Approval indicates much more than that!
Loan officers don’t approve loans!
Just as Realtors® don’t approve acceptance of offers, loan officers don’t approve loans. Lenders approve loans. In both cases, the Realtor® and the Loan Officer are acting as facilitators of the transaction. Neither of them has the authority to legally bind the parties they represent.
A Pre-Approval Letter is such a strong buyer’s tool because it means that a Lender has reviewed the buyer’s application and supporting documentation (pay stubs, bank statements, W2′s etc.). In addition, the Lender has agreed in writing, that they will loan money to the buyer if they find an acceptable property. Loan officers can confirm to a buyer that they will be able to get a loan. The Lender will confirm that the buyer is actually approved for a loan. This approval will have loan conditions to satisfy, but it is a real approval. The predominant condition will of course be that the buyer finds a piece of acceptable real estate! Pre-approvals are issued without an address.
If you wish to be viewed as a Serious Real Estate Buyer, have your Pre-Approval Letter in-hand before shopping. The selling agent will take you more seriously. The listing agent will take you more seriously. The seller will take you more seriously. A pre-approval letter puts you in the driver’s seat when you are ready to negotiate.
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Mark – Both a timely and great post….thanks for putting out great material.
Mark,
I must bookmark this series of posts because I just ran into having to explain this concept today with one of our Buyer prospects. Thanks so much for putting this into really easy to follow info.
Mark…. I agree, this is very well explained and written. I have written a few posts on this, trying to drive home the difference. Just the other day I read a blog from another loan officer talking about the difference between a pre-qual and a pre-approval. And I didn’t agree with their explanation of the pre-approval letter. This person talked about reviewing the documents, but never the fact that an underwriter even looked at these documents. Again, I think was misleading the public. You did a great job here. jeff
Bucky: A really excellent complimentary article to mine. Fortunately, obtaining a pre-approval letter prior to the home search has become a more common practice, but there are still many Buyers who neglect to do so. Hopefully, your words here will encourage many to do so!