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Why A PreApproval Letter?
“Why does the Seller want me to have a PreApproval letter and/or Proof Of Funds?”
Yes, that is a good question and there are good reasons, particularly with homes priced over $500,000. I frequently hear from Buyers agents that their Buyer did not want to provide that information, or that they were offended that a Seller required those credentials. First, this is no reflection on a valid Buyer who is actually looking to purchase this caliber of home. My job is to protect my Client and their property. It is my experience that those people who actually have the wherewithal to make this purchase do not mind providing the necessary documents.
Let's reverse this. If you were the Seller, wouldn't you want to know that the people wanting to spend an hour or two, going all through your home, attended only by an unknown agent, to have actually been validated? Wouldn't you want me to verify the letter with the source? Of course you would. And, I will verify the letter. An alarming percentage of letters provided me are actually invalid. Some are clearly fakes and some with real skill to look very real. Frequently on a banks letterhead but the banks representative didn't write the letter. I have to ask myself, "Why does this person want to get in my Clients home so bad that they would forge a letter?" Would you want that person in your home?
As a Buyer, if you are serious about buying a home, you would want to have (at least) a PreApproval letter ready to accompany an offer on a home you just found and love. You want your offer to look better than the "other" offer by showing the Seller that you have the ability. Offers are frequently written on nights and weekends when lenders are less available so having this already done takes the pressure off of you.
As an agent representing the Seller, I have a responsibility to my Client to make sure that anyone going through their home with (frequently) an unknown agent actually has the ability to purchase the home. These days, Sellers frequently work from home and having to vacate their home for an hour or two is very inconvenient. Further, they have to quickly tidy up, turn on all the lights, etc. This process could easily take 2-3 hours of their time. In cases of homes over $1,000,000 there are so many hidden features that, as Sellers agent, I have to be present to show the home. This is a commitment of at least 3 hours for me as well as the Buyers agent.
What are proper "credentials" of financial ability that are requested by Sellers Agents?
First of all, there is no violation of privacy. Any letter from a lender only provides the name(s) of the Buyer(s) and states that they have looked at the information provided by the Buyer and they are qualified to have the particular letter for a particular amount. In my case, the letter is provided only to me by the Buyer or the Buyer's agent. I do not pass it on to the Seller. I do tell the Seller that I have reviewed the letter and verified that it came from a qualified source.
It should be mentioned here that I am looking for an "arms length" 3rd party verification. This 3rd party needs to be from an established lender or a representative of firm holding the potential buyers funds. A letter generated internally by an employee of the buyer is not acceptable.
A lender provided PreQualifed letter is hardly worth the paper it's written on. It only states that this person is in a broad category of people who have been known to possibly be able to purchase a home. No credit was pulled and frequently, few, if any, questions were asked. A PreQualified letter is inferior because there little to no investigation of the ability of the Buyer to actually buy. This letter is nearly instantly available and, again, it is nearly worthless.
The minimum required is a PreApproval letter from a lender. This is a letter issued by a lender stating that the lender's representative has spoken to the potential Buyer and has answers to a few questions such as employment, income and a couple other questions. The lender has pulled the credit of the potential Buyer and feels that the person has the potential to be approved for the requested amount. This is a minimum amount of effort and time on behalf of the Buyer as it only takes about 10 minutes and the lender can provide a PreApproval letter in about an hour.
The next best is a Loan Commitment letter from the lender. This means that all answers to the questions for the PreApproval letter have been documented to the lender by the potential Buyer. An underwriter has looked the Buyer's file over in detail and has committed the lender to making the loan. The Buyer has shown the lender the necessary funds for down payment and closing costs. The only remaining provision is that an Purchase and Sale Agreement for a specific property has been provided and that the property must appraise for the amount (or more) of the contract.
Of course, the gold standard (no pun intended) is to provide Proof Of Funds sufficient to purchase the home for cash. This document is provided, generally, by an officer of the institution where the funds reside. Again, no privacy was violated as the letter by the officer of the institution only states that the person has sufficient and uncommitted cash on hand to make a purchase of a home in the appropriate price range.
So... Please don't be offended. It is just a good business practice that is beneficial to everyone involved - especially you, the Buyer!
Jim Gibson - Harry Norman, Realtors - Associate Broker - 770.605.2020
Need a letter right now? Contact Donna Casteel of HomeServices Lending - 770.633.5155
By Jim Gibson, Associate Broker – Harry Norman, Realtors – 770.605.2080 copyright 2015