Most people who set out to buy a home, be it house, townhouse, condo, apartment, or mansion on a hill, know they need to have a lender letter in hand saying they are qualified for a loan. What most ìciviliansî (people not in the real estate business) donít realize is how much the value of a lender letter varies.
Letís look at some of the general ways a lender letter varies, which sort you want, and how to present it to a seller to put you in the best possible position to buy that sellerís property. If youíre working with a broker, he or she will coach you in these matters. If youíre shopping on your own, and especially if youíre looking at FSBOs (for sale by owner properties), you need to know this stuff.
Lender letters come in two general types, pre-qualification letters and pre-approval letters. The bold print on the page may call it one thing, and when the letter is read, it actually proves to be the other, so pay attention. A pre-qualification letter is weaker than a pre-approval letter.
The weakest pre-qualification letter basically says that ìif everything the borrower has told me is correct, he/she is eligible to borrow $XXXXXX.î All you really have here is the buyerís word paraphrased by a lender. Unfortunately, there is an old adage in real estate that ìbuyers are liarsî. This is well known, so presenting this type of a letter tells a seller you are not in a very strong position with the lender.
A stronger version says ìI have looked at an ëin fileí credit report, and based on that and what the borrower has told me, he/she is eligible to borrow $XXXXXX.î This is still not great, but it is a step in the right direction.
The pre-approval letter says ìI have checked this personís credit reports, seen all necessary substantiating materials relative to incomeÖassetsÖetc., and my firm is committed to making a loan subject only to receiving a copy of a contract to purchase and the propertyís appraisal for the contract price or higher.î The letter may not say it, but it is also subject to the underwriting process that includes looking at updated credit information. Regardless, this letter carries a lot of power and sellers will be very happy to see you.
A Word to the Wise
The above discussion of lender letters brings up something you should be keenly aware of as a buyer. Your credit must not change in any substantial way between the time you first apply for a loan and the time you go to settlement on your new home.
If youíre buying waterfront property, do not go out and buy a boat until after youíve closed on the property. I once saw someone make this mistake and almost lose the property purchase because of it. He had to quickly find a new lender and accept a higher interest rate to keep the deal from going south.
If youíre moving from a small condo to a larger place, thereís the temptation to run right out and buy more furniture for your new quarters. Fine. Just wait until after youíre the proud new owner.
If you are serious about buying a home, a lender letter is a key part of your negotiating ammunition. To save yourself a lot of aggravation during escrow, get a pre-approval letter before you go house hunting.