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.