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What is the difference between a Pre-Qualification Letter and a Pre-Approval Letter?

What is the difference between a Pre-qulification Letter and Pre-approval letter?

Most people who set out to buy a home, be it a 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. However, most people who are not in the real estate business don’t realize how much the value of a lender letter varies.

Let’s look at some 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 seller’s property. Your real estate agent will coach you in these matters.

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.

Pre-Qualification Letter

The weakest pre-qualification letter basically says that “if everything the borrower has told me is correct, he/she is eligible to borrow $XXXXXX.” All you really have here is the buyer’s word paraphrased by a lender. Unfortunately, presenting this type of letter tells a seller you are not in the strongest position with the lender.

A step above the first example says, “I have looked at a credit report, and based on that and what the borrower has told me, he/she is eligible to borrow $XXXXXX.” This is still not great, but it is a step in the right direction.

Pre-Approval Letter

The pre-approval letter says, “I have checked this person’s credit reports, seen all necessary substantiating materials relative to income…assets…etc., and my company is committed to making a loan subject only to receiving a copy of a contract to purchase and the property’s appraisal for the contract price or higher.” The letter may not say it, but it is also subject to the underwriting process that includes updating 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 you’re moving from a small condo to a larger place, there’s the temptation to run right out and buy more furniture for your new home. Fine. Just wait until after you’re the proud new owner. Opening any new line of credit must be avoided until after closing.

If you are serious about buying a home, a lender letter is a crucial part of your negotiating ammunition. Get a pre-approval letter before going house hunting to save yourself a lot of aggravation during escrow.

The SAYHAY Team can walk you through the home buying or home selling process to successfully meet your goals.  Contact The SAYHAY Team at 412-755-3600 to schedule a free consultation if you are considering buying or selling a home.

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