This isn’t the first time I’ve written about preapproval letters at The Mortgage Porter…however it has been a while and I would say that with all the changes in the mortgage industry, your preapproval letter is more important than ever. Most Seattle area real estate agents will not accept an offer on a home that’s listed for sale without a bona fide preapproval letter.
Preapproval letters may vary in appearance and content from lender to lender. Some mortgage companies may have different protocal for when a preapproval letter may be issued. When I provide a preapproval letter, it means that I have a complete loan application, most likely with exception to the property address since the home buyer has not yet identified a home. It also means that the home buyer (i.e. borrower) has provided me all the necessary documenation that supports or backs up the information that has been provided on the loan application, such as
- income documenation (to make sure they qualify for the proposed montly mortgage payment)
- assets (at minimum, enough to cover the down payment and closing costs)
- credit report…everything seems to be based on your credit score from potential interest rates to what you qualify for. This is something that we need to pull if you are interested in obtaining an actual preapproval.
A good preapproval letter should address all of these items so that the seller and the real estate agents know how qualified the home buyer is. This is done in a manner in which not to violate the buyers privacy. For example, a seller or real estate agents should not see the buyers income, assets and credit scores. If a buyer wants to share that information with someone other than their mortgage professional, it is up to them! Instead, the preapproval letter will address that these items have been reviewed and are acceptable.
For example, I might include something like this in a preapproval letter:
This preapproval is due to your job stability and excellent credit. Funds to close this transaction are from your personal savings and a seller contribution in the amount of $5,000.
You can see that I have addressed income, assets and credit in this paragraph.
My preapproval letter also includes program type, the sales price and loan amount. Every so often I’ll have a real estate agent want me to leave the sales price blank. This is something that we can do IF the borrower has substantial cash reserves. I’ve found that some home buyers would rather not have their preapproval letters written this way…and I’m happy to provide several preapproval letters with staggered sales prices (as long as the borrower has documented the funds for down payment and closing costs).
You may find a total mortgage payment on a preapproval letter. This is because borrowers are qualified by their mortgage payment since loans have a certain allowed debt to income ratio. If a borrower is a little pushed with their ratios and they find a home within the sales price and loan amount they are preapproved for, but the property taxes or home owners insurance are higher than estimated or mortgage rates climb higher than what they were approved at, you no longer have a preapproved buyer. Whether or not your mortgage originator includes what payment you’re preapproved for, it’s important to ask.
Any conditions to the loan approval should be included on the preapproval letter. Standard conditions on our preapproval letter may include:
- satisfactory purchase and sales agreement
- satisfactory title commitment
- subject to appraisal
- subject to changes to financial situation as disclosed on the loan application (i.e. changes in your employment, debts or assets may jeopardize your preapproval status).
Preapproval letters may also have an expiration date. Before our current lending environment, preapproval letters would be valid for a longer period of time. Now credit reports and other supporting documentation “expire” earlier. Should your preapproval letter expire, they’re typically easy to update by just supplying your latest supporting documentation (paystub, bank statement, etc).
The letter should have a date and be signed by whomever prepared the letter with their contact information.
When I prepare a preapproval letter for someone who’s buying a home located in Washington, at the very least, they have gone through preliminary underwriting. If a mortgage originator has not obtained your documentation or if you have not completed a loan application, you are probably just prequalified and not preapproved.
With HUD’s new Good Faith Estimate, unless you have a property address, you may not receive a good faith estimate with your preapproval letter. This is a glitch with RESPA that I hope HUD finds a way to correct. Even HUD admits that if a mortgage professional provides a good faith estimate without a property address, they’re doing so at great risk (due to the financial liabilities packed in the new Good Faith Estimate). Your mortgage professional can provide you with a “work sheet” until you have a transaction (property address).
If you are shopping for a home anywhere in Washington state, I’m happy to help you become preapproved.