What Is a Pre-Qualification Letter? Not a Guarantee You’ll Get That House
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What is a pre-qualification letter? A mortgage lender will give you this official document once you decide you might want to borrow money from the lender. But how much will that letter actually boost your chances of successfully making an offer on a house? Experts say it offers very little help.
“I tell most people they can take that pre-qualification letter and throw it in the trash,” says Patty Arvielo, a mortgage banker and president and founder of New American Funding, in Tustin, CA. “It doesn’t mean all that much.”
Of course, this letter does serve some purpose for home buyers, otherwise it wouldn’t exist, right? So is it worth pursuing pre-qualification before bidding on a house? Read on.
What to know about a pre-qualification letter
Of the two kinds of letters buyers typically obtain before they start house hunting—pre-qualification and pre-approval—the pre-qualification letter is the lesser of the two when it comes to buying power, says Denise Shur, a Realtor with 1:1 Realty in San Jose, CA.
Potential buyers will obtain a pre-qualification letter from a lender. This letter says the lender thinks you appear to be qualified for a loan up to a certain amount and is based on information you proviced on your assets, income, and expenses.
A pre-approval letter, which also comes from a lender, is provided after you submit proof of your assets, income, and expenses (in the form of pay stubs, tax returns, and bank statements), and allow the lender to pull your credit. The pre-approval letter will be written on the lender’s letterhead, showing its name and contact information, and include your name and the loan amount you’re qualified for. Usually the letter will state that the loan is subject to the property you choose, verification of your financials at the time of purchase, and any other lender requirements.
Both are intended to give a seller confidence that the buyer is able to make an offer on a house, but a pre-approval letter carries more weight because it’s based on actual proof. Neither letter, however, is a guaranteed loan offer.
Where a pre-qualification letter falls short
Many of the real estate agents Shur has talked to advise clients to consider putting forth the extra effort to nail down a pre-approval letter over a pre-qualification note.
Buyers won’t stand a chance with just a pre-qualification letter in a highly competitive market, says Jennifer Beeston, vice president of mortgage lending for Guaranteed Rate Mortgage in Santa Rosa, CA.
“My best advice to a buyer would be get a pre-approval letter from a lender with a good reputation. If the real estate agent Googles the lender and there is a track record of performance, you have a better chance than if your lender is a no-name entity,” she says.
It’s critical for the pre-approval letter to be on the lender’s letterhead with its contact information, says Shur.
“As agents, we have seen it all and know that some people will ‘fake’ letters by typing them up on a blank piece of paper, hoping it will work,” she explains. “A well-written pre-approval letter makes it very clear that you are using a quality, legitimate lender who can be reached for verification.”
Is pre-qualification worth the effort?
Getting pre-qualified isn’t totally useless, says Roman Ludwing, a real estate broker with Pro Agents Realty in Coral Springs, FL. “It does get your offer in the door to at least show the seller interest while getting the pre-approval letter,” he says.
Some brokers even require clients to have pre-qualification before working with them, according to Ludwing. “The letter would indicate that a lender has already started communicating with the buyer,” he says.
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