This question comes up every time sellers receive a written purchase offer accompanied by the buyer’s Pre-Approval for mortgage financing. Buyers already know that their offer will be taken more seriously when they support it with a Pre-Approval letter from their lender, though what does that Pre-Approval really represent, and how dependable is it?
Residential real estate markets across the country have noticeably softened from the strong sellers market of 2021 and 2022. Back then, many sellers in “hot” markets (like Florida) openly demanded cash-only offers, adding that any written offer including a Financing Contingency would be ignored. Here we are in early 2024 and things have changed. Multiple price reductions, longer Days-On-Market, and more listings that expire without selling have brought many sellers back to the reality of buyers using mortgage financing.
Even with interest rates higher than a year or two ago, mortgage financing is still an integral part of US residential real estate markets, especially as they move closer to balanced conditions.
Sellers don’t want a deal to fall through after they accept an offer, take their property out of the Active market, and the listing status changes to Pending or Under Contract. Once that happens, buyer interest drops off significantly because the property is already locked up by another buyer. Knowing what a financing Pre-Approval really contains (or doesn’t) can help sellers better decide whether to commit to that one buyer.
Accepted offers that go a few weeks or a month, then dissolve and terminate because of denied financing are a waste of everyone’s time.
With a well-supported Pre-Approval, buyers are more than halfway to receiving full loan approval, significantly shrinking the time needed between an accepted offer and closing. This is an important fact to tell sellers when submitting an offer with a Financing Contingency.
Many buyers might think a Pre-Approval goes further than a Pre-Qualification. Not really. They are just different ways to refer to basically the same thing because their intended use is the same: to indicate ahead of time that buyers have some chance of getting the financing they need to buy a house or condominium.
In this article, I am using “Pre-Approval” as any written estimate of a buyer’s ability to receive mortgage financing, including Pre-Qualifications and letters of credit.
Pre-Approvals are preliminary estimates of mortgage affordability based on information a buyer has provided to the lender. They are neither offers to lend, nor agreements to borrow. By definition and function, they are prepared before buyers even submit an offer on a specific property.
Keep in mind that PRE- is the most important concept in a Pre-Approval. It is not an Approval because there is still a fairly involved process before the lender will issue a written Mortgage Commitment to grant and fund the loan.
According to the Consumer Financial Protection Bureau (CFPB), the Federal Agency that oversees all things mortgage-related in the US, borrowers have made loan application when they provide their lender with just the following 6 pieces of information:
- Borrower name
- Stated income
- Social Security numbers (for credit report)
- Property value (estimate, not yet Appraisal)
- Loan amount requested (for preliminary Loan-To-Value ratio)
- Specific property address
Note that none of these items has to be verified in order for the buyer/borrower to have made a loan application and receive mandatory disclosures from the lender.
In fact at the pre-application stage, lenders are prohibited from asking for supporting documents for any of these items. With the exception of a credit score, the beginning of a mortgage application is based entirely on information provided by the applicant without verification. This means that a buyer can comply with the purchase contract’s Financing Contingency requirement to make timely loan application, yet not have provided any supporting documentation up to that point.
However, serious borrowers are free to voluntarily provide verification at this preliminary stage. That is how a Pre-Approval becomes a supported, dependable document, not just something quickly thrown together to submit with an offer.
A specific property address is usually what turns a loan inquiry (Pre-Approval) into a loan Application, causing the borrower to receive CFPB-required disclosures before continuing.
Before sending an Application to their Underwriting departments for loan approval, lenders must still ask for and receive follow-up information to support everything the buyer has stated in the Application. This can include tax returns, bank statements, employment and earnings verifications, letters of explanation, and anything else needed to support the application.
If most of these items are already in the file from a supported Pre-Approval, the full approval timeline is well ahead of schedule.
Remember that the contract’s Financing Contingency period (often 45 days after an offer is accepted) is steadily counting down while all this is going on. We will discuss Financing Contingencies in depth in upcoming articles.
Only after a fully supported Application is submitted to Underwriting and it looks good for final Approval, can the lender provide a Mortgage Commitment. The Mortgage Commitment (or denial) is the only document that provides buyers with enough information to decide whether to continue on toward closing or to fall back on the Financing Contingency and bail out of the deal without penalty.
Here is what to look for in a solid, dependable Pre-Approval:
- Date prepared and name of lender
- Buyer/borrower name(s)
- Purchase price and loan amount
- Property type (single family, condo, townhouse/villa)
- Term and structure of loan (30 year fixed, 5 year ARM, etc)
- Proposed occupancy (primary residence, second home, investment)
- Type of loan (conventional, FHA, VA, USDA)
- Loan or file identification number
- Name and contacts of person who prepared it
And here’s what to do when you receive a Pre-Approval accompanying an offer from a buyer:
First, make sure ALL the above items are included – then email the person who prepared it and ask :
- Have available funds for down payment and closing costs been verified?
- Has this file received initial processing and preliminary Underwriting review?
- Do the buyers qualify for any other loan programs than the one indicated on the Pre-Approval? (“Plan B”, if needed)
And most importantly here in Florida –
- Have you allowed for property taxes, home-wind-flood insurance, and any mandatory Condo or Homeowners Association charges/fees? If so, are the amounts appropriate for the specific property now under contract?
Of course, the person who prepared the Pre-Approval cannot disclose any buyer personal confidential information, though he or she can certainly answer these basic questions with an informed Yes or No.
Many sellers still think that a cash deal can be better than a financed deal. This is not necessarily the case. Cash buyers often try to offer below asking price while extracting more concessions and better terms from sellers because they think their cash should buy them a sweeter deal. A buyer with a well-supported Pre-Approval can compete head-to-head with a cash buyer, as long as everyone understands how Pre-Approvals and Financing Contingencies really work.
Remember – whether the buyer pays cash or uses mortgage financing, the seller still receives the entire contract price for the property.