Pre-Approval Letters and What They Mean
Let’s imagine that you’ve got your budget all figured out in your head. You know the numbers that you can make work, and you’re all set to start looking for home. You go onto your favorite realtor website, set all the perimeters to fit your desires and ability, and then, boom, an ideal and lovely home pops up. You don’t want anyone else to snap it up before you, so you immediately contact the seller and make an offer. In response, they ask for a pre-approval letter. And you say, “…a what?”
Pre-approval letters are issued by banks or other lending companies and indicate to sellers that, although all of the numbers haven’t been crunched completely, it seems very, very likely that you will qualify for a loan and are therefore in good standing to make an offer. Without this letter (unless you’re purchasing a home outright, with cash, which pre-approves itself), no seller will take your offer seriously. You will in effect be wasting everyone’s time.
Getting pre-approved is therefore an essential step in the process of searching for a home, and something that should absolutely not be ignored. In fact, it is a good chance that your realtor has already suggested that you go and speak to a lending house. Perhaps they’ve even provided you with a list of recommendations for precisely this purpose! Use this list. Talk to the lenders. Get that pre-approval letter.
That, however, is not the end of the process. It is possible that you will be pre-approved for more than what you can really afford (something that we saw happening quite frequently shortly before the financial collapse of 2008). It is also possible that you have factors within your financial history that prevent a lending house from offering you as much as you think you should be able to receive. Things in this latter category include:
- Poor credit
- Complicated income streams
- Lack of full-time employment
Getting a pre-approval letter is not a guarantee that you will, in fact, be able to receive the loan in question, but it is a fairly solid indication that this will happen, and it will make it so that your offer will be taken seriously by any seller.
Finally, we want to once again encourage you to study your own financial and abilities independently of any financial institution. It is a sad but true fact that the only entity truly looking out for your financial interests during the home-buying process is you yourself.