Buying A Home - Dealing With Lender Letters
By Raynor James, Fri Dec 9th
Most people who set out to buy a home, be it house, townhouse,condo, apartment, or mansion on a hill, know they need to have alender letter in hand saying they are qualified for a loan. Whatmost "civilians" (people not in the real estate business) don'trealize is how much the value of a lender letter varies.
Let's look at some of the general ways a lender letter varies,which sort you want, and how to present it to a seller to putyou in the best possible position to buy that seller's property.If you're working with a broker, he or she will coach you inthese matters. If you're shopping on your own, and especially ifyou're looking at FSBOs (For Sale By Owner properties), you needto know this stuff.
Lender
letters come in two general types, pre-qualificationletters and pre-approval letters. The bold print on the page maycall it one thing, and when the letter is read, it actuallyproves to be the other, so pay attention. A pre-qualificationletter is weaker than a pre-approval letter.
Pre-Qualification Letter
The weakest pre-qualification letter basically says that "ifeverything the borrower has told me is correct, he/she iseligible to borrow $XXXXXX." All you really have here is thebuyer's word paraphrased by a lender. Unfortunately, there is anold adage in real estate that "buyers are liars". This is wellknown, so presenting this type of a letter tells a seller youare not in a very strong position with the lender.
A stronger version says "I have looked at an 'in file' creditreport, and based on that and what the borrower has told me,he/she is eligible to borrow $XXXXXX." This is still not great,but it is a step in the right direction.
Pre-Approval Letter
The pre-approval letter says "I have checked this person'scredit reports, seen all necessary substantiating materialsrelative to income...assets...etc., and my firm is committed tomaking a loan subject only to receiving a copy of a contract topurchase and the property's appraisal for the contract price orhigher." The letter may not say it, but it is also subject tothe underwriting process that includes looking at updated creditinformation. Regardless, this letter carries a lot of power andsellers will be very happy to see you.
A Word to the Wise
The above discussion of lender letters brings up something youshould be keenly aware of as a buyer. Your credit must notchange in any substantial way between the time you first applyfor a loan and the time you go to settlement on your new home.
If you're buying waterfront property, do not go out and buy aboat until after you've closed on the property. I once sawsomeone make this mistake and almost lose the property purchasebecause of it. He had to quickly find a new lender and accept ahigher interest rate to keep the deal from going south.
If you're moving from a small condo to a larger place, there'sthe temptation to run right out and buy more furniture for yournew quarters. Fine. Just wait until after you're the proud newowner.
If you are serious about buying a home, a lender letter is a keypart of your negotiating ammunition. To save yourself a lot ofaggravation during escrow, get a pre-approval letter before yougo house hunting.
About the author:Raynor James is with http://www.fsboamerica.org - providing FSBOhomes For Sale By Owner. Visit our "sell my home" page athttp://www.fsboamerica.org/seller.cfm to list and sell your homefor free for one month. Visithttp://www.fsboamerica.org/buyer.cfm to see homes for sale byowner.
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