Pre-Approval Letter conveys the lender’s approval to provide a loan to a borrower of up to a certain amount based on the lender’s evaluation of the information provided by the borrower. Pre-approval is generally based on the analysis of the borrower’s credit report and income documentation. Note that a pre-approval is not a loan approval. Also, it does not obligate the borrower to obtain a loan from the lender that provided the pre-approval letter.
Pre-approval is performed at the time when the borrower is in the market to purchase properties. For this reason, a pre-approval is not tied to particular property.
The primary purpose of obtaining a pre-approval letter is to demonstrate the ability in obtaining a mortgage loan. This proves valuable when shopping for homes by showing to the seller that the buyer is serious about buying a property and that a bank is willing to provide a loan based on the buyer’s credit history and income. A seller is likely to give preference to buyers that have obtained pre-approval letters.
Pre-approval is based on the evaluation of the income, employment history, and credit history of the borrower. The lender obtains documentation to support income and may even verify employment. The pre-approval letter is specific to borrower’s circumstances.
A pre-qualification is based on the information provided from the borrower. A lender does not obtain a credit report or review income documentation. Pre-qualification may only provide an estimate of how much a borrower can borrow based on information provided.
You may benefit in a number of ways by obtaining a pre-approval letter:
You may want to consider the following while obtaining a Pre-Approval Letter:
A lender may want to establish a pre-approval program as part of its marketing efforts to attract prospective borrowers. The loan agents will get an opportunity to establish a relationship in the early stages of the buyer's process of buying a property and obtaining a mortgage loan. The downside of the program will be extra costs and effort in pre-approving borrowers who fail to buy a property or go to another lender for the loan.
We recommended that you include the following in the Pre-Approval letter:
A lender may want to check with the legal and compliance department to ensure the contents of the letter meet regulatory requirements and does not expose the lender to any undue risk. Consideration may also be given to Regulation B/ECOA, Regulation C/HMDA, and State guidelines.
Updated: Aug 13, 2013