What Good Are Pre-Approval Letters?


For the sake of clarity, the words "Pre-Approval", "Pre-qualification", and "Pre-qual" letters are used interchangeably but they all mean the same thing. They aren't legally binding contracts and have no "teeth". They aren't even guarantees. In reality, they're not worth the paper they're written on. What good are they?


They actually perform two very important roles. First, they help the buyer determine how much home they are qualified to buy. There's no point looking at $800K homes if the buyer only qualifies for a $500K home.


Just as importantly, prequals give both the listing agent and seller some reasonable assurance that someone has looked at the buyer's financials and stated they can afford the home. I can't speak for every listing agent, but I require a prequal letter whenever an offer is submitted.


When I receive a prequal letter, I make sure my seller clients understand it's not a guarantee the buyer will get the financing on their home. It just means preliminary investigations into the buyer's finances have been undertaken. The final approval letter will not come until much later in the transaction ... or never at all.


The mortgage broker usually doesn't even see the buyer's financial records until the home is under contract and well into the transaction. If there are discrepancies they'll show up later and hopefully while the buyer is still in their financing period as outlined in the contract.


Usually, the mortgage broker just calls the buyer and asks questions. It might take half and hour, then a prequal letter will be generated. It's that easy. There is no verification of funds at this point. You can see it's all "loosey goosey" early on, so both the buyer and seller should never rely on a prequal letter as a guarantee of a loan.


Prequal letters are easy and quick to obtain and won't cost you a thing. You really should get one before you start looking at homes and in all likelihood you'll need one when your offer is submitted. We have lenders who would be happy to help you with your prequal letter.


Let us know if you'd like to be prequalified and we'd be happy to put you in touch with a good lender we trust.



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