The importance of the Buyer providing a pre-approval letter, and ‘proof of funds’ when submitting an offer on a home, cannot be overstated.
In fact, submitting these two documents is now considered a ‘standard procedure’ in real estate transactions wherein the Listing agent, representing the Seller, expects the Buyer’s agent to submit these documents-at the time the offer is made.
Unfortunately, most ‘pre-qualification letters, which lenders provide, are not worth the paper they are written on.
That is because a pre-qualification letter simply means that the Buyer has ‘spoken to a lender’and has answered a number of questions regarding buyers income, debts, employment, etc. However, none of this has yet been verified by the Lender.
Many times, there is important information that a Buyer may forget to mention to the Lender-and they may not understand the importance of that information-and how it impacts their ability to qualify for a home loan.
Buyers often have their agent set them up on a home search via the Multiple Listing Service. It is an exciting time! They start to receive great homes that are of interest every day or two. Then they want have their agent show them the property.
As harmless as this may seem, they are actually doing things in the opposite order; and putting the ‘cart before the horse’, so to speak-and that can be costly!
More-often-than not, the right home happens to just show up, unexpectedly, and not always at the most convenient time!
The Buyers are very excited to make an offer, however, they are not prepared just yet, because they have not provided a full pre-approval letter and haven’t yet pulled together their proof of funds, which is simply bank account or other financial account statements that show a liquid cash balance in an amount equal to or, in excess of, the Buyers down payment and closing costs. It is worth mentioning here the importance of ‘cutting out’ a portion of your account number because these documents are passed around to multiple parties in the transaction. I do not recommend simply using a marker to cross through the account number because people that would try and steal your identity, are now able to ‘see through’ the marked area and retrieve your account number so you can’t be too careful, these days, when it comes to identity theft!
As Buyers scramble around, last minute, trying to pull everything together, they run the risk of their offer NOT being accepted, for lack of supportive documentation, or may find out that the Sellers have just received another offer-which more often than not results in a bidding war. So, think about this for a second. All because the Buyers did not do things in the proper order, they are now faced with losing out on the perfect home-to a more ‘prepared’ buyer, who has their documents in order-or, at the very least, perhaps paying an extra $5,000 to $15,000 for the property. As you can see, doing things in reverse can be a costly mistake.
In light of the above, we always ask our Buyers to provide us with a pre-approval letter and ‘proof of funds’ –upfront-that we can keep on hand. That way, when the right home shows up, they do not run the risk of losing out.
Another recommendation that we make, is that the buyer not get the standard pre-approval letter but rather a letter stating that they have ‘Direct Underwriting’ approval, as this is THE strongest type of pre-approval that there is. The difference here is that all info submitted by the buyer has been verified by the lender and the Underwriter has reviewed the file and given them the ‘green light’.
When we represent sellers, which are about 90% of the time, we carefully review the Buyers documents to make certain that everything is in order-including Direct underwriting approval. If all else checks out, and we are not quite certain of the Buyers approval status, we then require, in the counter offer that the Buyer be cross-qualified to Sellers satisfaction, with our choice of Lender; someone whose opinion we know and trust.
If you have any questions about any of this, or any other real estate-related questions, please feel free to contact me anytime. I am always happy to hear from you-and help you any way that I can.