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PRE-QUALIFICATION LETTERS


Updated:         June 4, 2018

It has become common place today to request a pre-qualification letter to accompany the presentation of an offer to purchase. The perception is that a letter of confirmation of the buyer's ability to qualify for a loan can be critical in the seller's willingness to accept the purchase offer.

The reliability of the pre-qualification letter depends upon the information provided to the lender. Preferably, the lender would like to have conducted a credit report, verified income and identified the cash required in the transaction. At the very least, it is recommended that the lender will have acquired pay check stubs, bank statements and other easily provided information with which to render their opinion. With some lenders, the pre-qualification letter is prepared after having only had a conversation with the prospective borrower, relying solely on information acquired without any written confirmation. It is important, then, to know the extent of the information upon which the pre-qualification letter is based. Only then will you be able to judge the dependability of the buyer's pre-qualification.

In contrast to the pre-qualification letter is the "pre-approval" of the borrower. With today's "automated underwriting" capacity a quick approval (usually within 24 hours fo obtaining documentation from the buyer) can be acquired. It is still critical that the information inserted into the automated process be accurate as the final loan file must be “signed-off” by an underwriter.  So, the acquisition of pay stubs, bank statements and other documentation is important if the pre-approval is to be depended upon. While a pre-approval is not a "guarantee" that the buyer is capable of purchasing at the identified mortgage level it is more reliable than simply a pre-qualification. Typically, all that will be necessary to close the transaction, following the pre-approval, will be the property appraisal and the title and escrow information.

There are conflicting philosophies as to exactly when a pre-qualification or pre-approval letter should be presented to the seller. Some prefer to have a letter available at the time of original presentation of the purchase offer. This letter often does not identify the actual loan amount for which the buyer is qualified, but rather is of a more general nature. Others prefer to finalize the transaction with the understanding that a letter will be acquired within 24 hours of the acceptance of the offer. In this latter situation, the letter confirms that the buyer is qualified for the actual loan amount identified in the purchase contract.

Let's examine the timing for presenting the pre-qualification or pre-approval letter in a bit more detail. Let's assume a purchase contract with an offer to purchase of $250,000 with an anticipated 95% Loan-to-value ratio loan of $237,500. If the offer to purchase includes a pre-approval letter indicating that the borrower is "approved for a $237,500 loan", does it help or hinder the process? For instance, what if the seller is unwilling to accept the $250,000 offer and wants to counter offer at a higher price? Would the seller be reluctant to do so, perhaps believing that the $237,500 pre-approval amount is the maximum available to the buyer? Would this disadvantage the buyer?

Now, let's look at the other possibility. The buyer is actually pre-approved for a total loan amount of $250,000 but wants to make an offer, as indicated above, with only a $237,500 loan amount. If a seller sees a pre-approval letter for a $250,000 loan amount is it likely that the seller will want to counter offer at a higher price, recognizing that the buyer can obviously "afford it"? Doesn't this have the potential to disadvantage the buyer?

An alternative to the above scenarios could be to indicate to a seller that a pre-qualification or pre-approval letter will be forthcoming within three days of the signing of the purchase contract.  Three days will allow a lender sufficient time to provide an accurate analysis of the borrower’s ability to purchase.  

So, there is a strategy to when to provide a pre-qualification or pre-approval letter and determining exactly what it should include. We will gladly provide either type of letter upon request. Additionally, we will identify within our letters the actual data upon which we base our opinion . . . thereby providing a bit more reliability in the pre-qualification and/or pre-approval.

Regardless of when the pre-qualification or pre-approval letter is provided, any letter is only as reliable as the information upon which the opinion is based and upon the competency and veracity of the lender providing the information. Our reputation is that if "Humboldt Home Loans says that a borrower is qualified, you can depend on it". We look forward to providing you a letter of pre-qualification or pre-approval should you wish to contact us in preparation for your home loan.

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