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What Is A Buyer's Financing Pre-Approval Really Telling You?

By Christopher Carter - Real Estate Broker Associate

August 10, 2023

This question comes up every time house or condo 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 if they support it with a Pre-Approval letter from their lender. Though what does that Pre-Approval really represent, and how dependable is it?

Real Estate Markets across the country have noticeably softened from the strong Sellers Market of 2020 to mid-2022. Back then, many sellers in "hot" markets (like Florida) openly demanded cash-only offers, adding that any written offer with a Financing Contingency would be ignored. Here we are in early 2023 and times have changed. Price reductions, longer Days-On-Market, and more listings that expire without selling have brought many sellers back to the realities of buyers using Mortgage Financing.

Even with Interest Rates gradually rising, Mortgage Financing is still an integral part of U.S. Real Estate Markets, especially as those resale markets move closer to balanced conditions.

Sellers don't want a deal to fall through after they accept an offer and take their property off the Active market by changing the listing status to Pending (with or without contingencies). Once the listing status changes due to an accepted offer, new Potential Buyer Interest drops off significantly because the property is already locked up by another buyer. At that point, others can only submit back-up offers if they are still interested. By knowing what a financing Pre-Approval really contains (or doesn't), sellers can better decide whether to believe in it enough 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.

Sellers are not the only ones who have to depend on Pre-Approvals. Buyers themselves need to know that what they are submitting with their offer presents a realistic picture of their ability to get mortgage financing. When buyers feel strongly enough about a property to submit a purchase offer, they want to know that they have a good chance of actually receiving financing and owning the property.

Buyers should also keep in mind that with a well-supported Pre-Approval, they are more than halfway to receiving full loan approval, significantly shrinking the time needed between the accepted offer and closing. This is an important fact to tell sellers when submitting an offer with a Financing Contingency.

Properly prepared mortgage Pre-Approvals give both sellers and buyers the peace of mind and confidence they need to proceed with the transaction.

Many buyers and their Real Estate Agents might think a Pre-Approval goes further than a Pre-Qualification. Not really. They are just different ways to refer to 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 condo. Whatever you want to call it - the more supported it is, the better the chances of mortgage funding arriving at the closing table.

In this article, I am using "Pre-Approval" referring to 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 submit an offer on a specific property.

As you'll see shortly, a thorough and dependable Pre-Approval contains most of the elements needed to turn into a supported Application when a purchase offer is accepted.

According to the Consumer Financial Protection Bureau (CFPB), the Federal Agency that oversees all things mortgage-related in the U.S., borrowers have made loan application when they have provided their lender with just the following 6 pieces of information:

• Borrower name(s)
• 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 initial loan disclosures from the lender.

In fact at the Pre-Application stage (Pre-Approval), 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.

However, borrowers are free to voluntarily provide verification of what they submit at this preliminary stage. That is how a Pre-Approval becomes a supported, dependable one.

Providing verified details moves the Application closer to either loan approval or denial. Without additional documentation, we don't yet know in which direction it will go.

A specific property address is what turns a loan inquiry (Pre-Approval) into a loan Application, causing the borrower to receive CFPB-required disclosures before continuing. Therefore, a buyer can comply with the purchase contract's Financing Contingency requirement to make a timely loan application, yet not have provided any supporting documentation up to that point. Buyers who delay providing supporting documents and verifications either voluntarily or when the lender asks for them are at risk of running out of time on their Financing Contingencies and having to bail out of the purchase.

Before sending an Application to their Underwriting departments for loan approval, lenders must still ask for and receive follow-up information to support anything in the Application that the Borrower has not already provided. This can include Tax Returns, Bank Statements, Employment and Earnings Verifications, letters of explanation, and anything else needed to support what the buyer has put on the application.

If most of these items are already in the file from a 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 supported Application is submitted to Underwriting (with full documentation) 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.

It is very important for sellers to understand what is in (or not in) a buyer's Pre-Approval so they can evaluate the chances of it actually becoming a fully approved and funded mortgage loan. The better supported a Pre-Approval is, the better its chances of becoming a funded mortgage.

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 with 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? (your "Plan B," if needed)

Simple Yes or No answers are sufficient for the above questions And most importantly here in Florida -

• Have you allowed for Property Taxes, Home-Wind-Flood Insurance, and any mandatory recurring 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 follow-up questions with a Yes or No.

Being able to interpret how dependable a mortgage Pre-Approval might be is valuable for sellers, buyers, and their Real Estate Agents. Don't hesitate to ask questions now that you know what to look for in one.

Many sellers think that a cash deal can be better than a financed deal. This is not necessarily the case. Cash buyers may 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 supported Pre-Approvals and contract Financing Contingencies really work. Sellers should learn how to negotiate the terms of an offer, not just the price.

Remember - whether the buyer pays cash or uses financing, the seller still receives the entire contract price for the property.

Editor's Note: Christopher Carter is NOT an attorney. He does not give legal advice. For interpretation and application to specific circumstances of anything you read in this article, you must speak with a Florida-Licensed attorney.

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