By Robert Irwin
If you're going to buy a home from a person selling by owner, you should present them with a good pre-approval letter. This comes from a lender and specifies how big a mortgage you can afford to get. It may give the actual maximum loan amount, or sometimes the maximum monthly payment (from which the maximum loan can easily be calculated).
There are three solid reasons that you want to give a good pre-approval to the "by owner" seller:
It lets the seller know that you can afford to buy the property. Presumably the letter indicates that you can afford a big enough mortgage that, when combined with the down payment, will cover the seller's price.
It keeps you from having to discuss your personal finances with the seller. With the letter, you don't need to tell the seller how much money you make or where your bank account is located. The letter should be enough.
It becomes a negotiating tool. If there are other bidders on the property, the one who doesn't have a pre-approval letter is odd-man out. The one with the strongest pre-approval letter, all else being equal, often gets the house.
It should be apparent that there are different types of pre-approval letters. They range the gamut from a simple pre-qualifying note typed out by a real estate agent to a solid commitment document from a lender. You should know the difference.
Anyone can "pre-qualify" you. It's basically only a statement of opinion as to your ability to handle a mortgage. It carries no more weight than the person who filled it out, who could be your brother-in-law. Today's savvy sellers are on the lookout for such virtually worthless letters.
On the other hand, you could go to a mortgage broker who might ask you a few questions about your income, expenses and savings, run a credit check and then issue you a "pre-approval" letter. This has more weight than the pre-qualifying letter noted above, but not much because the broker didn't contact a lender directly. You won't be able to cash it in for a mortgage later on, and many savvy sellers know this.
The best pre-approval letter comes directly from a lender. You've talked to the lender and answered about 60 questions on an application. The lender has then submitted the application to an underwriter (typically Fannie Mae or Freddie Mac) who has gotten back with at least a tentative (based on your finding a house that appraises out, not losing your job, having the cash in the bank and so on) approval. A credit check typically goes along with the underwriting. This letter actually is a type of loan-commitment, and savvy sellers are duly impressed if you have it.
WHERE DO YOU GET A GOOD PRE-APPROVAL LETTER?
You can get them in person from mortgage brokers and mortgage bankers (banks that only handle mortgages). Today, however, often the simplest way is to get them online. Our Mortgage Center offers access to free, no obligation pre-approvals specifically for Owners.com customers. Click here for more details. Many of the online lenders will thoroughly investigate your finances and issue a solid commitment.
Besides, if you get a good online pre-approval letter, it's bound to impress a by owner seller who's also listed online.
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 for Owners.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.