When it comes to buying or selling a real estate property, the lenders' pre-approval letters play a crucial role. Therefore, you will find below, for your convenience, a synopsis of some of the most important facts that both buyers and sellers should know about the lenders' pre-approval letters.
1) The importance of the lenders' pre-approvals letters for buyers
As a buyer, the pre-approval letter from a lender demonstrates that you have been pre-approved for a specific loan amount. It shows the sellers that you are a serious buyer and that you have the financial capability to purchase the property.
Prequalification vs. Pre-approval: Prequalification is a basic assessment of your financial situation, while pre-approval involves a more comprehensive evaluation of your creditworthiness, income, and other factors. A pre-approval letter holds more weight and is highly recommended when making offers on properties. In the bay area, if you give the sellers a prequalification letter instead of a pre-approval letter your offer will most likely be rejected.
Validity Period: Pre-approval letters have an expiration date, typically ranging from 60 to 90 days. Therefore, make sure to update your pre-approval letter before writing an offer on a property.
Conditional Pre-approval: In most cases, the lenders’ pre-approval letters will come with conditions that must be met before the loan can be finalized. These conditions could include additional documentation or verification of certain information. Ensure you understand and fulfill these conditions promptly to proceed smoothly with your purchase.
Lastly, shop around for lenders: It's advisable to compare loan offers, interest rates, and terms before presenting an offer on a property. This will allow you to choose the most favorable financing option for your real estate purchase.
2). The importance of the lenders' pre-approval letters for sellers
As a seller, bear in mind that your real estate agent needs to request obtain, and verify the pre-approval letter and the proof of funds received from the prospective buyers who are presenting an offer to purchase your home.
You and your real estate agent should take the time to review the pre-approval letter carefully. Look for important details such as the loan amount, down payment, interest rate, expiration date, and any contingencies or conditions that may affect the buyer's ability to secure financing. If you and/or your real estate agent have any concerns or questions about the buyer's pre-approval, your real estate agent should reach out to the lender directly to gather more information or seek clarification before accepting the offer.
As a side note, for the proof of funds, make sure that the name on the bank statements matches the name of the person who offers to purchase your property and check the date the bank statements were issued.
Backup Offers: Even if you have accepted an offer from a buyer with a pre-approval letter, it is wise to consider backup offers from other interested parties. This ensures that you have alternatives in case the primary buyer encounters financing issues without having to go back on the market. For the record, a backup offer is an acknowledgment of an existing offer and ensures a contract with the seller if that first offer falls through. It's a legally binding contract that, if accepted by the seller. In other words, it will put the backup offer next in line to purchase the home should the first buyer back out.
Contingencies and Deadlines: Pay close attention to the contingencies outlined in the purchase agreement, especially those related to the buyer's financing namely the loan and appraisal contingencies. Ensure that appropriate deadlines are set for the buyer to remove these contingencies, allowing you to proceed with the transaction smoothly.
That said, always bear in mind that pre-approval letters are not a guarantee of a loan, and the buyer's financial situation can change. Therefore, the buyers’ agents must remind their clients that this is not the time to quit their job, make large purchases on credit, or take out another loan once their offer has been accepted. All of the above-mentioned actions could be reasons for the lender to deny final approval on the mortgage they need.
To conclude, both buyers and sellers should not disregard the importance of the lenders' pre-approval letters in any real estate transaction.
Should you have any questions regarding this matter, feel free to contact me.