Mortgages Analyzed
 
Pre-Approval Letter

What is a Pre-Approval Letter?

Pre-Approval Letter

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 vs. Pre-Qualification

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.

Source :www.MortgagesAnalyzed.com
 

Considerations for the Borrower

Benefits to the Borrower

You may benefit in a number of ways by obtaining a pre-approval letter:

  1. Demonstrating a Serious Buyer: The letter shows to the seller that you are serious about purchasing a property and you are backed by a pre-approval from a lender. A seller would be more willing to negotiate with a buyer that has shown the ability to close a loan. Also, the real estate agent is likely to work harder for you after you have been pre-approved.
  2. Knowledge of Maximum Loan Amount: The pre-approval letter shows the maximum amount of loan you can obtain. This reflects your credit standing and current market conditions. While you may be able to calculate on your own how much you can afford, the pre-approval process will help in providing a more accurate amount of how much you can borrow and what kind of properties to focus on.
  3. Faster Loan Approval: After putting an offer on a property, you may decide to obtain the loan from the lender that provided the pre-approval letter. In this case, the lender already has your income and credit information and would likely be able to approve the loan much faster.

What to Look Out For

You may want to consider the following while obtaining a Pre-Approval Letter:

  1. Adverse Effect on Credit History: The lender will obtain your credit report. This may negatively affect the credit history and credit score since the credit report will show an inquiry from a financial institution. Therefore, you should choose a lender that you are more likely to get a loan from.
  2. Shop Around: Once a property has been selected, you may want to shop around for the loan and not just revert to the lender that provided the pre-approval letter. This is especially of importance when a long time has passed between the date when pre-approval letter was obtained and the date when an offer on the property was made.
  3. Tendency to Borrow to Maximum Loan Amount: The pre-approval would show the maximum amount of loan that you can obtain. You should not use it as a targeted loan amount but as a ceiling. Also, the real estate agent may try to sell properties where you would need to obtain the maximum loan amount. In the end, your decision to purchase the property should be based on your individual needs and not upon the maximum loan amount.
  4. Negotiations with Seller: You should consider when to provide a pre-approval letter to the seller. Showing it in too early in the negotiation stage may give the seller the idea of much you can qualify and therefore be less willing to negotiate on price.
Source :www.MortgagesAnalyzed.com

Considerations for the Lender

Why Provide 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.

Contents of a Pre-Approval Letter

We recommended that you include the following in the Pre-Approval letter:

  1. Borrower's Name: The name of the primary borrower
  2. Maximum Loan Amount: The maximum amount of loan that the borrower is approved for
  3. Maximum Sale Price: The maximum sale price of the property. This may be provided to ensure that the loan is within your LTV guidelines.
  4. Date Issued: Include the date when the letter is issued
  5. Expiration Date: Date when the pre-approval will expire
  6. Conditions for Obtaining a Loan: List specific conditions that the borrower needs to fulfill in order to obtain a loan. These conditions may include verification of income, marketability of title, or sufficient appraisal value
  7. Not a Commitment to Lend Statement: Include a statement that the pre-approval letter does not constitute a loan approval or a commitment to lend. Also, the borrower is not obligated to obtain a loan from the lender.
  8. No Fee Charged Statement: A statement that no fee was charged from the borrower.

Legal and Compliance Review

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.

Source :www.MortgagesAnalyzed.com
 

Document Summary

 
Pre-Approval Letter
Purpose
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.
Use in Mortgages
Pre-Approval Letter is used by the borrower to demonstrate their ability to obtain a mortgage loan.
Other Names
None
Type
Letter
Provided By
Loan Originator
Provided To
Applicant/Borrower
Notarization Required
No
Signed By
Loan Originator
Life Cycle Stage
Sales
Recordkeeping
None. However, we recommend keeping it in the records for a period of two years.
Model Form
None
Applicable Laws
None
Source :www.MortgagesAnalyzed.com

Sample Documents

  1. Sample Pre-Approval Letter

Updated: Aug 13, 2013

Comments

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It does not obligate the borrower to obtain a loan from the lender that provided the pre-approval letter
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