By Robert Irwin
In my last column I addressed the issue of getting a good pre-approval letter when you're a buyer. However, I received an interesting note from a reader/seller who asked, "How do I tell a good pre-approval letter when I'm a seller?" A good question, one we'll deal with in this column.
When you're selling "by owner," chances are every interested buyer will show you a pre-approval letter. (If they don't have one, you can direct them to the Owners.com Mortgage Center
.) This letter claims to show that the buyer has the wherewithal to come up with financing to close the deal.
But, does it really? Is the pre-approval letter truly a guarantee that you've got a live buyer who can afford to purchase your home?
A lot depends on how much the letter is for, who issued it, and its terms of commitment:
The letter should give you the maximum mortgage amount and, hopefully, the maximum LTV (or loan-to-value) ratio. For example, if it says the borrowers can get up to $270,000 at 90%, it means that they will need to put 10 percent down, in this case $30,000 and the maximum they can afford to pay is $300,000. If your home costs more than this, and they don't have more cash, they probably can't make the deal. Note: sometimes the letter will just give a maximum monthly payment. This can then be translated into a maximum loan amount. Any good mortgage website has tools which let you do this.
In order to carry weight, the letter should be from a lender who actually funds loans such as a bank or a mortgage banker. (A mortgage banker uses its own funds to offer mortgages. This is in contrast to a mortgage broker who solicits borrowers for a lender, but who does not actually make the loans.)
The reason it's important to get a letter from an actual lender is that this company can back it up. If it says it will lend money, then it has that money to lend. If, on the other hand, the letter is simply from, for example an agent (often called a "prequalifying letter"), it's nothing more than a statement of opinion as to how well the borrowers will fare if and when they actually seek out a lender.
The third important feature of the letter is its commitment. Ideally, you'd want the letter to say that the lender commits unequivocally to lend the money to the borrower. However, almost no pre-approval letters will say this, since there are many factors unknown to the lender at the time the letter is written (such as what the property will appraise for, will the borrowers' credit remain good, will they remain employed and so on).
Therefore, the best you can reasonably hope for is that the lender has thoroughly checked out the borrowers at the time of their application and they were "tentatively" approved for a mortgage. The letter should say that pre-approval is based on both a credit check and an underwriter's okay. (Underwriting is mainly done by secondary lenders such as Freddie Mac or Fannie Mae.) What this means is that the borrowers can get the loan, provided their financial condition doesn't change between the time the letter was written and the time they apply, and of course if your property appraises out.
Anything less than this is still a guess and an opinion.
Robert Irwin is the most prolific real estate writer in America having produced over 100 published books in the field. His TIPS & TRAPS McGraw-Hill series has sold well over a million copies and his FOR SALE BY OWNER KIT and FIND IT, BUY IT, FIX IT and other books have been strong sellers for Dearborn. In addition Irwin writes a regular real estate column for The Wall Street Journal online and is introducing a new weekly column forOwners.com.
Irwin has sold his own property "by owner" and during over 30 years in the business has been a broker and consultant to lenders, agents, buyers and sellers.