What should your buyer’s pre-approval letter contain? A letter from a lender should always accompany an offer from a potential buyer. How that pre-approval reads is important. It can be the difference between your transaction making it to the closing table, or not.
What Is A Pre-Approval Letter
What exactly is a “pre-approval” letter? It’s a letter from the bank or a mortgage lender that states the bank will lend a buyer the money to buy a house. The reason it’s pre is because the lender still needs to verify that the buyer is able to pay the money back over the life of the mortgage. That verification process happens in underwriting after the buyer is in contract.
The lender uses some upfront information to determine if the buyer is a risk worth taking. That information usually consists of but is not limited to;
- A qualifying credit score.
- How much money the borrower makes.
- How much debt the borrower carries.
If all that checks out then the loan officer will issue a pre-approval letter. The buyer submits that letter along with an offer for your house.
Types Of Pre-Approval Letters
So you have an offer on your For Sale By Owner accompanied by a pre-approval letter. There’s something very important you need to know about that letter from the bank. There are two different kinds. Here we are going to discuss those 2 different types of letters and what you need to look out for.
Unverified Pre-Approval Letter
One way a lender may gather information on a potential borrower is to pull credit and ask a series of questions. Those questions are designed to establish the borrowers ability to be able to pay back the loan. Some loan officers may issue an approval based on those answers without verifying the information given.
That’s important! Sometimes that’s called a pre-qualification instead of an actual pre-approval. Not an actuall approval. In a case like that the lenders letter will read something like;
Financing is contingent on buyer submitting
- Most recent paystubs.
- Most recent bank statement, or two.
- Last two years W-2’s
- Most recent tax return
Here’s an example of a not so great pre-approval letter.
That means that the lender has taken the borrower at his word about income and after they are in contract verifies the information. The problem with that is if the buyer has given information the lender can’t use, overtime is a common on. Sometimes the the buyer simply isn’t truthful. When that happens your deal falls apart.
Verified Pre-Approval Letter
A verified pre-approval letter, and the type you want, is the opposite. The lender has done all the due diligence before issuing a letter. The lender verifies with documentation all of the buyers income and debt. In short he makes sure the buyers income and debt answers were accurate.
There will still be an underwriting process to further secure the buyers ability to repay the loan but that is mostly a formality.
Which Do You want?
With the income and debt verified upfront there is a much better chance of your transaction making it to the closing table. You want the pre-approval letter that the lender has taken the time to verify and document the buyers ability to successfully buy your house.
Make sure your buyers letter is not contingent on verification of income and debt.