In this article, I will be discussing pre-approval letters.
You will learn what a pre-approval letter is, what information is typically contained in it, and see some examples for your reference.
As an experienced realtor and loan officer, I know both sides of the transaction and can share with you from my own experience. Let’s dive in and learn more.
What Is a Pre-Approval Letter?
A pre-approval letter serves as proof that the lender has taken the borrower through the pre-approval process. The pre-approval process is by which a lender determines if a potential borrower can receive financing through that lender and for what amount of money.
Pre-approvals are always in writing and must be issued according to the policies and procedures established by the lender.
This letter typically accompanies an offer to purchase a property and is presented alongside the Purchase Agreement to give the seller confidence that the buyer has the ability to obtain financing.
In many areas, having a pre-approval letter is a requirement of contract acceptance.
This is a very important step of the home buying process.
Where to Get a Pre-Approval Letter?
A prospective borrower will obtain a pre-approval letter from a mortgage lender. That lender could be a bank, a mortgage company or a mortgage broker.
One of the best resources for finding good mortgage lenders or brokers are Loanfully’s mortgage lender directory or realtors.
Loanfully’s directory is nation’s largest database of top mortgage lenders, brokers and loan officers. Our editorial team have done all the vetting of the lenders so you won’t have to.
Likewise, full-time real estate agents work with many lenders and have visibility on lender rates and service.
Another great resource is your network – anyone in your circle that can recommend a lender that they worked with and had a great experience with.
Regardless of who you go to, you will be getting the pre-approval letter from the lender you chose.
How Long Does it Take to Get a Pre-Approval Letter?
I am often asked “How fast can I get a pre-approval letter?”. The answer of course is that it varies by lender. Depending on the lender, an application will be taken either online, in person or over the phone.
Once the lender has received the application, a credit check is completed and the credit report and credit score are added to the application for consideration.
If an applicant is pre-approved, the time it takes to get a mortgage loan pre-approval letter can be within an hour or two while some lenders can take as long as 24-72 hours.
Again, it varies by the lender and the lender’s process. This is why it is important to get a pre-approval letter BEFORE you start shopping for homes.
If the lender takes 24-72 hours to provide the letter, there’s a possibility that a buyer can miss out on a great home because they don’t have a pre-approval letter to attach to their offer.
What Is Included in a Pre-Approval Letter?
The pre-approval letter format will also vary by lender, but the following information is typically displayed:
- Borrower(s) Legal Name(s)
- Type of Financing (i.e., conventional, FHA, VA, etc.)
- Max Loan Amount or Max Purchase Price
- Down Payment Details
- Conditions
- Home Sale Contingency
- Expiration
- Lender Details
Let’s go into a little more detail on each of these.
#1 Borrower Name(s)
The letter will include the name(s) of the individual(s) who have applied for loan consideration.
Remember that in many circumstances, not all buyers on a real estate transaction are also on the pre-approval letter.
For example, if there is a married couple and one of the spouses has sufficient income and superior credit to the other, it may behoove them to only have that person on the mortgage loan to get a better interest rate.
So, while they will both be on the title of the property, only one person will be on the pre-approval letter.
Another thing to be mindful of is that the name(s) should match all the residential purchase documentation. The names should be in the form that the borrower(s)/buyer(s) wants to take title in.
For instance, if a borrower has a middle name, the decision needs to be made if they want to include their full middle name, just an initial or nothing at all.
All the documents need to match, otherwise, an addendum will need to be completed to make the loan documents and the purchase documents the same.
#2 Type of Financing
Once the lender receives all the required information to issue a pre-approval decision, the lender will be able to provide the type of financing program(s) the borrower qualifies for.
It will state that the borrower has been pre-approved for a conventional loan, FHA loan or VA loan which are the most commonly used types of loans.
Sellers and listing agents will be looking to see which financing program the buyer will be using should their offer be accepted. I go into depth on why a seller and listing agents like one financing type over another in my article titled “
#3 Max Loan Amount or Max Purchase Price
The pre-approval letter will also have the maximum loan amount or maximum purchase price the borrower has been pre-approved for. This is important to sellers to ensure that the borrower has been approved for enough to cover the offer price.
Do not be surprised if the pre-approval matches the exact offer price as is often the case. Many buyers and/or buyer’s agents will ask the lender to adjust the pre-approval to match their offer.
This does not necessarily mean that the borrower does not qualify for more or does not have room to go up during negotiations. If during the negotiations, the final purchase price is higher than the original offer, be sure that the final pre-approval letter is also updated.
#4 Down Payment Details
The pre-approval letter will also typically show how much the borrower intends to put as a down payment. Many first-time homebuyers will qualify for as low as 3.0% down.
If the borrower is a veteran and chooses to take advantage of his VA loan benefits, then the letter may display a zero-down payment.
It is important as a realtor, buyer and/or seller to consider the potential perceptions of a no- or low-down payment to be able to anticipate any concerns that may arise.
#5 Conditions/Contingencies
When a lender issues a pre-approval letter, a lender is stating that the prospective borrower’s situation has been investigated and as long as all circumstances stay the same, the lender is willing to loan the borrower money to purchase a home.
The operative words being “as long as all circumstances stay the same”. You will see language built into the pre-approval that covers the lender should the borrower’s situation change which no longer makes them eligible for a loan with that lender.
In addition, once a borrower is officially “under contract” on a property and beginning the loan process, there will be conditions that must be met and approved by the underwriter before final approval is received to fund this loan.
Again, there typically is language in a pre-approval letter that states this. Some pre-approval letters will be more specific on these conditions than others as it varies lender to lender.
For example, you may see language in pre-approval letters that state that final approval is “contingent upon an appraisal” or “contingent on receipt of all required conditions as requested by underwriting and satisfactory appraisals”.
#6 Home Sale Contingency
Another contingency you may see on a pre-approval letter is a home sale contingency. Many buyers also have a home to sell. However, not every buyer with a home to sell needs to sell their home before they purchase a new one.
A lender will make that determination during the pre-approval process. If the borrower is unable to get a mortgage loan without selling their current home, the lender will say that this pre-approval is contingent upon the borrower selling their home first.
If the borrower can purchase the home without selling their current home, you will see language similar to “She is pre-approved to do so without contingencies”.
The home sale contingency is an important detail for both buyers and sellers but for different reasons which is outside the scope of this article.
I explain it in detail in my articles titled “How to buy a home before I sell mine?” and “Should I accept an offer with a home sale contingency?”
#7 Expiration Date
A pre-approval letter is valid for a limited time and does have an expiration date to it. This should be stated on the letter itself. How long a pre-approval is good for varies by lender.
The pre-approval is typically good for 60-120 days (2-4 months). If the transaction is closed and loan is funded within that time frame, a new pre-approval does not need to be completed.
If it is passed that time, a prospective borrower will be required to go through the pre-approval process again which will include having their credit pulled again. Updates typically go much faster if the majority of the details remain the same.
#8 Lender Details
Lastly, the lender details will be included in the pre-approval letter. This will include:
- Company/Bank Name
- Loan Officer
- Loan Officer Contact Details
- NMLS # (if applicable)
The lender that the buyer selects is an important detail, not only to buyers, but also to sellers and listing agents.
To understand why sellers and listing agents care about the buyer’s choice of a lender, please read my article “Why choosing the right lender can make or break your offer?”
Mortgage Pre-Approval Letter Samples
To give you a better understanding of the information contained within pre-approval letters, please click here for a few examples.
The format of a pre-approval letter will vary widely by lender but these examples give you an idea of what you might see.
Final Thoughts
A pre-approval letter is a vital piece of the home buying process. The information contained in it will give a seller confidence on the buyer’s purchasing power and provide the buyer guidance on the types of homes a buyer should be looking for.
A good realtor and lender will be able to guide a buyer/borrower on the process and ensure that they feel educated along the way.
If you need further guidance on obtaining a pre-approval letter, I invite you to reach out to me and I will be happy to assist you with your financing needs.
