What are these “letters” and why do I need them?
If you’re eyeing the idea of purchasing a home, then chances are you’re already wondering how much the bank will lend you toward a purchase. And when the time comes to make an offer, rest assured, sellers will be wondering the same – whether or not you’re capable of borrowing enough to follow through on an offer. The best means for tackling these questions is by securing a pre-qualification or pre-approval letter from a qualified lender.
Prequalification letters are based on a very basic set of verbally provided information, which a loan officer uses to generate an idea of how much you may be able to borrow. That information includes such things as current income, a list of assets and your monthly financial obligations—all of which are weighed against current lending guidelines. But here’s the thing you should know about pre-qualification: Without providing more complete details, along with official documentation to back them up, a lender’s opinion is only preliminary. In other words, their estimate is only as good as your word. Informed sellers know this and may take your offer “with a grain of salt.”
Pre-approval letters are similar to pre-qualification letters, but the pre-approval process takes things a step further for added assurance. When you’re pre-approved for a loan (not just pre-qualified), a lender has secured all of the documentation necessary to verify and weigh your finances against bank requirements. This process, called “underwriting,” leaves you one quick step away from actually securing a loan. In addition to telling you exactly how much you’re allowed to borrow, it also leaves you with an exact idea of things like how much cash you’ll need and what your monthly payment will be. Don’t get me wrong, there are still plenty of things to do before you can close on a purchase (like appraisals and inspections, for instance), but with a pre-qualification letter in hand, you’re ready to follow through quickly on a purchase.
They both have their place
If you’ve stumbled upon that perfect listing sooner than expected and need to act fast, then a pre-qualification letter is your ticket to attaching some level of assurance to your offer (it takes about 15 minutes). On the other hand, if you’re just getting started, why not begin the process with pre-approval, so you can generate the strongest possible offer?
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