Preapproval Letters Defined and Updated

This is an update from a post I wrote back in early 2007 about preapproval letters. So much has changed in the mortgage industry in the past few years that I thought it was worth refreshing this post with updated information.

The preapproval letter is a tool typically drafted by a loan originator to be used by a buyer’s real estate agent when presenting an offer on a property.   The letter may be in the form of a certificate or be an actual letter on the lender’s letterhead.   The preapproval letter is intended to assure the seller and the listing agent that the buyer has been buyer has been approved by the lender and therefore accepting an offer from this buyer, there should ideally not be any financing issues with the buyer.

When I prepare a preapproval letter, it usually contains the following (depending on the program):

• Effective dates (the date the letter was written) and expiration date.
• The borrower’s names (who is approved for financing).
• The sales price and loan amounts they are approved for.  
• Maximum mortgage payment (including any home owners association dues) the borrower is qualifed for.  NOTE: this is very important when we're in an environment where rates may rise quickly.
• The type of financing is confirmed (ex. Conventional, FHA, VA, USDA, etc.)
• Credit has been reviewed.
• Employment and income has been confirmed.
• Down payment and funds for closing (closing costs, prepaids and reserves) are verified.
• Any closing cost that are being requested to be paid for from the seller.
• Any item the preapproval is subject to (such as satisfactory appraisal, title, complete purchase and sale agreement, etc.).
• Mortgage originators name and contact information.

If these items have not been actually verified with proper documentation, then a buyer has been prequalified—not preapproved.  BIG DIFFERENCE.  Being prequalified essentially means that a verbal interview has been conducted without providing all of the necessary supporting documents (pay stubs, W2s, bank statements—again, depending on the type documentation required for the specific loan “full doc” to “no doc”).  A Good Faith Estimate does not constitute a preapproval.

The preapproval letter does not contain private information such as a buyer’s credit score or their additional assets.   It is a sales tool for the buyer’s agent and if there are multiple offers presented on a home, having a strong preapproval letter is an advantage.   This is one reason why it is crucial for buyers to become preapproved before they begin shopping for their next home.   Many listings agents will not even consider an offer unless the buyer has been preapproved.    

The preapproval letter is generally effective a specific amount of days, depending on when supporting documentation is set to expire (such as the credit report).  Updating a preapproval letter is simply re-running the credit and possibly obtaining most recent income and asset documentation (paystubs and bank statements).    On occasion, the buyer’s agent may request a revised preapproval letter if they are presenting an offer on a home that is priced for less than what the buyer is approved for and if they are asking for closing costs.  It's not uncommon for me to issue several preapproval letters for a home buyer based on different homes or offers they are presenting.

Real estate agents may also consider who the preapproval letter is from, and they may contact the lender to confirm the buyer is indeed prepproved and not just prequalified.   Many agents will tell you that the preapproval letter is only worth the paper it’s printed on.   This is also why it’s very important to be selective with lender you work with…it could possibly impact whether or not your offer is accepted on your next home.

I highly recommend starting the process early (6 to 12 months before you're planning on buying) just in case there are unknown credit or down payment issues.  I can also prepare preapproval letters on weekends as long as I have been provided all of your supporting documentation.   If you're considering purchasing a home located anywhere in Washington state and need a preapproval letter, I'm happy to help you!