What’s a Pre-Approval Letter?

Unless you’re planning to submit an all cash offer, you’ll likely need to finance the balance of your home purchase price with a mortgage. Understandably, sellers want proof that potential buyers can secure the financing they need to close the home purchase. That’s why most sellers will insist on a financing pre-approval letter as part of a competitive offer package, and may even go further and request to speak to your mortgage banker or broker before accepting your bid.

It can take several weeks for a lender to compile your information and run through its internal processes for issuing a pre-approval letter, so it’s a good idea to begin this process early in your home search. If your primary bank has a mortgage lending division, that’s often a good place to start, as they may have promotional interest rates or special terms for existing customers.

Pre-approval letters should be specific to each home you bid on, and should reflect the exact purchase price you plan to include in your bid. Be careful not to accidentally undermine your bid strategy in your pre-approval letter (for example, if you’re bidding $1,000,000 but your pre-approval letter says you’re approved for a loan up to $1,200,000, the sellers will know that you have additional room to increase your bid and may decide to counter-offer you).

Unfortunately, a pre-approval letter is not the same thing as actually having a loan application approved. Once your bid is accepted, you’ll need to quickly complete the formal loan application process, then work together with your lender to coordinate an appraisal of the home and ensure the loan is approved, processed and funded in time for closing.

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