Prequalifying Buyer's and Preapproval Letters

Prequalifying homebuyers has taken on a new form in the last year or so as foreclosures dominated the marketplace. Since the boom lenders have been requiring borrowers to qualify at their bank in order for their offer to be considered and to make sure they are qualified borrowers. Although I can understand the banks motivation for this requirement, agents must understand that not all lenders are able to offer the same financing or terms associated with financing, so although one lender may not be able to to secure financing, another may.

Most agents believe a preapproval letter from one lender is the same as a preapproval from another and accept this as fact without question. I am here to shatter this assumption. Not all preapproval lenders are the same. Moreover some preapproval letters carry more weight than others. It is time agents recognized this fact and started directing their clients to lenders that offer the most favorable terms and have the most options.

This begins by understanding the difference between lending institutions. A direct lender is very different from a correspondent lender, which is different from a portfolio lender, which is different from a broker.

Of all these categories a broker offers the most options for any borrower. The reason is simple - because they are able to form relationships with all of the above, all options remain open. Moreover, brokers are offered wholesale interest rates from approved lenders opposed to retail pricing found at these other establishments. This is an important distinction that you should make clear to potential buyers who have not discussed their financing options with a broker. Point in fact most brokers offer a more beneficial price cost structure for the loan established than the lender's retail counterpart would. Considering this, you are actually doing your client's a disservice if you do not suggest they consider a broker for financing.

The benefits do not stop here. Preapproval letters come in all shapes and sizes. The work behind the preapproval letter is important and something I do not hear many people discussing. A preapproval letter can be drafted with a completed loan application and credit report. Point in fact I can have a completed application and credit report in 15 minutes of question and answering, 5 minutes later you could have a preapproval letter.

This letter can be drafted at this point in time because I know the lending guidelines and have confirmed the borrower based on their application fall into these guidelines. With that said, this is not where my preliminary work as a finance broker stops. From here we typically submit the file to our preferred lender for underwriting. Once the file is reviewed by the underwriter one of three decisions is issued: approved, suspended, or denied. Denied, is self explanatory and will come with an explanation why. Denials are few and far between if the broker has done their homework and the borrower has not misrepresented their situation on the loan application. Suspense simply means the underwriter needs more information before granted a decision and will include what exactly they require. Approved is naturally what we are looking for. A formal conditional approval is going to list everything still required to close the loan.

Formal approvals also come with a letter of intention, or commitment letter that demonstrates how long this formal approval is good for. By far this is the best type of preapproval and can be accomplished before the buyer has found a home to make an offer one. Imagine the advantage of having a formal approval when making an offer rather than starting the process with the bank owned representative. The time required to close is reduced significantly.

If you aren't, you should consider referring your buyers to a finance broker to secure their financing.