Home Buyers and Sellers Both Need to Know the Important Difference Between a Buyer Pre-Qualification Letter and a Pre-Approval Letter

Copyright © 2014- 2023  AUTHOR: Paul R. Marino, REALTOR® since 1988, e-Pro®

 

This article is going to be of great benefit to both homes sellers and home buyers alike. It's a lot to go through, but will potentially save you from making a serious misstep. For those for sale by owner (FSBO) sellers out there that have wisely decided to list with our Flat Fee MLS program (sometimes referred to as an Entry Only MLS Listing program), you're technically not a for sale by owner (FSBO). Why? Because by listing with us, you have harnessed the enormous power of the entire buyer broker community in your particular market. What does this mean for you? It means that every single licensed agent or broker in your respective state (we're licensed in Connecticut, Massachusetts Maine, New Hampshire, and Vermont) is able to participate in your home sale and earn a buyer broker commission. We're talking thousands of agents. And if you are correctly priced, and offering our recommended 2% buyer broker payout, you will, in all likelihood, be successful. A full 97% of all home sellers enrolled in our Flat Fee MLS programs (Flat Fee MLS Connecticut, Flat Fee MLS Maine, Flat Fee MLS Massachusetts, Flat Fee MLS New Hampshire, or Flat Fee MLS Vermont) successfully make it to the closing table. That's an incredibly high success rate.

 

So let's say you've priced your property at market and buyer brokers (as well as buyers not tied to a buyer broker) are making inquiries of your property. With any luck, an initial showing will result in a follow up second showing. And some of those second showings will materialize into an offer. It is absolutely critical that our Flat Fee MLS Listing home sellers know how to evaluate the financial picture of the buyer that is targeting their home. Depending upon which of our listing programs you signed up for (Level One [Free], Level Two [$699], or Level Three [1%]), you are not alone, and have many options available to you.

 

At Level Three, you literally do nothing. We handle this entire buyer screening process for you. Put your feet up and relax. If you're at Level One (Free), or Level Two ($699), this article will very precisely explain what you need to do to ensure a successful transaction. And even if you've signed up for Level One or Level Two, you're still never left in a lurch, because we offer you the ability to purchase a-la-carte advice if you run into a jam and just don't know how to proceed. At a nominal $249 per hour of consultation, this could be the smartest outlay you make. You may use your hour of consult time over multiple incidents and sessions. Compare this nominal outlay to being clobbered with a 3% listing side sales commission (that's $10,500 on a $350,000 home sale). Ouch.

 

With every showing requested, but especially so when dealing directly with buyers not tied to a buyer broker, it is critical that you determine very early on the financial strength of the buyer. Personally, I won't even permit a showing if a buyer can not produce a Pre-Qualification letter at the bare minimum. This is not to be confused with a Pre-Approval letter, which we'll discuss in just a moment.  You'll have it a little easier when working with a buyer broker, because they've done some screening of their own. All buyer brokers work off commission, so they are especially tuned in to whether or not the buyer they're hauling all over town has the financial wherewithal to successfully make it to the closing table. Most buyer brokers are smart enough to have their buyers meet with a mortgage lender on the very front end of a home search, to ensure they're not wasting their time on unqualified buyers.

 

It's almost a foregone conclusion that at a minimum, a buyer working with a buyer broker has a Pre-Qualification letter from a mortgage lender. Typically, the way it works is like this: When a buyer has given their buyer broker the go ahead to submit an offer, the buyer broker (if they're competent, and most are), will attach the Pre-Qualification letter right to the offer. This is a good thing, but it doesn't mean you're out of the woods and can let your guard down. It is important for you to know that a Pre-Qualification letter from a lender is not the same as a Pre-Approval letter. This becomes critically important when it comes time to either accept or decline an offer. Just because an offer comes in at full price, with no contingencies, and a pre-qualification letter does not necessarily mean it beats out a slightly below ask price offer, but accompanied by a more powerful Pre-Approval letter. They sound an awful lot alike (Pre-Qualification vs. Pre-Approval), but they are light years apart in terms of what they mean.

 

A Pre-Qualification letter can be generated by a mortgage lender in literally minutes. By contrast, a Pre-Approval letter takes hours, or days to do the necessary due diligence to produce such a letter. While all mortgage lenders are a little bit different, there is simply no way for you to know how meaningful a Pre-Qualification letter is unless you know what it's based on. And the only way that is going to happen is for you to jump on the phone, and make contact with the mortgage officer that signed the Pre-Qualification letter. If you're a Level Three client, we will do this for you, and communicate the results to you the minute we get off the phone with the lender. In general, Pre-Qualification letters are generated very quickly, without doing a whole lot of research. Again, all mortgage lenders are different. Some are more thorough than others. But you should know that many Pre-Qualification letters are generated: 1) Without performing a formal credit check; 2) Without filing a formal mortgage application; 2) Without verifying employment; 3) Without verifying income; 4) Without verifying debt obligations; or 5) Without verifying assets or cash available on hand to apply to the purchase. At this stage in the qualification process, the mortgage lender may be relying solely on what the buyer has told them. The buyer may have told the lender he makes $125,000 per year. But this figure may have been based on overtime, and the additional pay can not be used in the qualification.

 

For you Level One or Level Two Flat Fee MLS Listing clients out there, here's what you need to do: You need to make live phone contact with the mortgage loan officer of the buyer. You must do this before you decide to accept an offer. Because once you accept the offer, you're hands are tied in the event a superior offer comes down the pike. Once you've got them on the phone, you have to understand that the mortgage loan officer is not able to disclose information that has been provided to them in confidence by the buyer. So don't come out and ask: "How much does the buyer make....What is their credit score?" No...not the way it works. You can say this: "Hello...Mr. Mortgage Lender...Hi...my name is Susan Seller, and one of your buyer clients has put in an offer on my property. I'll only take a minute of your time, and promise just a few generic questions. I received a Pre-Qualification letter this morning, and was wondering if you could tell me if you've pulled a credit report in advance of issuing your letter? You have? Great. Have employment, income, and debt been verified, or is that something you're still working on?" You get the idea. Be nice. Carefully study their answers, and the tone of voice. It will tell you a lot.

 

In general, a buyer coming in with a Pre-Approval letter is far more desirable than a paper thin Pre-Qualification letter. If credit has been checked, employment verified, and assets and debt confirmed, you can have far greater confidence your transaction is going to make it to the closing table. Even a Pre-Approval letter is not bulletproof. The approval will still have conditions, but most of the heavy lifting will be behind you. The Pre-Approval letter will be subject to a satisfactory appraisal that confirms the collateral is there for the loan. It will also be subject to a last minute check (right before the closing) that the buyer is still employed, and that the buyer has not gone out the day before the closing and purchased a $100,000 motorboat that throws their debt ratios out of whack. The bottom line is this...trust, but verify. You simply must know the financial strength of the buyer before signing any Purchase and Sales contract.