Buying a Home - Dealing With Lender Letters
Most people who set out to buy a home, be it 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. What
most "civilians" (people not in the real estate business) don't
realize is how much the value of a lender letter varies.
Let's look at some of the 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.
If you're working with a broker, he or she will coach you in
these matters. If you're shopping on your own, and especially if
you're looking at FSBOs (for sale by owner properties), you need
to know this stuff.
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, there is an
old adage in real estate that "buyers are liars". This is well
known, so presenting this type of a letter tells a seller you
are not in a very strong position with the lender.
A stronger version says "I have looked at an 'in file' 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 firm 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 looking at updated 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 buying waterfront property, do not go out and buy a
boat until after you've closed on the property. I once saw
someone make this mistake and almost lose the property purchase
because of it. He had to quickly find a new lender and accept a
higher interest rate to keep the deal from going south.
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 quarters. Fine. Just wait until after you're the proud new
owner.
If you are serious about buying a home, a lender letter is a key
part of your negotiating ammunition. To save yourself a lot of
aggravation during escrow, get a pre-approval letter before you
go house hunting.