Prequalification Letters: Understanding the Levels of each for Buyers

Mortgage prequalification letters Moving daycan be worthless words on a paper or it could close the deal!

Nowadays just about every real estate agent requires that a buyer be prequalified prior to spending valuable time and money showing houses to a buyer.  Some buyers still ask “Why is this needed?” and there are a lot more reasons than you may think.  If you haven’t read our recent article “Prequalification letter, why are buyers agents requiring it before showing houses?”, check it out here.

One thing to know as a buyer, seller, and Realtor is that not all prequalification letters and lenders are created equal.  There are 3 main categories of prequal letters offered by lenders which we explain today so that you have the knowledge to make your best decisions during the purchase process.

Why Prequalification Letter instead of Pre-Approval Letter?

Pre-Approval, technically because it contains the term “approval” is equal to issuing a ‘commitment’ which come with legal liability to a lender.  For instance, if a lender provides a “pre-approval” that means that they should have a situation which requires a Loan Estimate and then requires the lender to meet certain tolerances which can cost a lot of money if not accurate up-front.  It is very difficult to disclose accurately up-front when the costs and terms of the contract are not known.  Therefore a majority of lenders would and should use a prequalification letters rather than a pre-approval letter.  Some think that a prequalification letter is not a good thing, but as you will see below it depends on which type is provided and we firmly believe in the 3rd and best one.

Main Types / Levels of Mortgage Prequalification Letters

  1. Basic verbal buyer information and no credit report pulled – Why would someone accept this?
  2. Verbal buyer information and a tri-merge credit report – Better but still based on buyer verbal information & not verified information
  3. Verbal buyer information, actual income asset and credit documentation, and a tri-merge credit report – Best and what sellers and agents would want you to have in most circumstances

Below we fully explain the differences and which ones are best, but I bet you know which is best already.

Prequalification Letter with basic information and no credit report pulledWorst prequalification letter to use

This prequel letter is worth as much as the paper it is written on because all it has is some basic verbally provided information and not even a credit report to review.  There are so many buyers which thought they qualified for a mortgage and then once credit was pulled or tax returns were provided, it was denied.  So why would you ever agree as a seller to accept this type of prequalification letter that could be full of bogus or erroneous information?  Just say no!

Prequalification Letter with buyer supplied verbal information and a tri-merge credit report

This is better than the first option because we have a credit report now.  A credit report along with the verbal income, assets, etc supplied by the buyer gives a lender a good idea of the chances of qualifying.  But, there are so many things that are still based on verbal information or a even a guess at this point.  PREQUALIFICATION LETTER WITH CREDIT REPORTWhat if the buyer is self-employed?  Self-employed buyers usually don’t know their bottom line profit of their business and items to add back for qualifying income.  What if the buyer receives commissions, bonuses, or overtime?  Most do not know the average of these over a 1 – 2 year period.  Amounts in bank accounts and retirement accounts are usually a guess and can be off by a lot.  But often the buyer and/or the Realtor are in a rushed situation needing a prequalification letter immediately to make an offer on a popular listing.  As long as all parties understand that no documentation has been provided, they can make a decision to accept such or not.  This is usually the most popular type of prequalification letter, but not the best for a buyer, Realtor, or seller.

Prequalification Letter with actual income, assets, and credit documentation

Obviously a seller wants this one and really a buyer should want this one as well.  We know that a buyer often applies for a mortgage right when they have just found the perfect property and wants to submit an offer right away.  But providing the information up-front for mortgage processing provides so many advantages for the buyer!

Benefits to the buyer for waiting for the full prequalification letter

  • If the buyer provides the documentation quickly, the prequalification can be very quick tooBEST WAY FOR SUCCESS
  • Limits the chances of bad surprises that can kill the dream of moving in
  • Your prequalification amount is more accurate which saves you time
  • Complicated situations can be reviewed by underwriting up-front
  • You can close quicker because you have provided the documentation

Buyers do have the choice of providing documentation in the beginning or much later in the process, but wouldn’t you rather have the first scenario below?

Scenario 1:  Buyer provides information in initial interview, we pull credit and provide a list of items to provide for processing, buyer provides all documentation up-front, our team performs processing such as verifications of employment, assets, and rent, and has talked over the loan with underwriting if needed.  A strong prequalification letter is provided stating income, assets, and credit have been received so that an offer can be submitted.  A contract is provided to us and within a day, the rate is locked (if buyer chooses to), disclosures are provided and explained, disclosures are received, and the file is submitted to underwriting within 1 – 2 days of contract.  Underwriting approval is received within 1 – 2 days of submission while waiting on the appraisal, and it is smooth sailing to closing.  Buyer is very happy

Scenario 2:  Buyer provides basic information, credit is pulled, and a list of items is provided to the buyer.  The buyer chooses to make an offer on a property and goes under contract prior to providing any documentation.  After we receive the contract and provide disclosures to the buyer, and they have been signed, we remind the buyer that we really need their documentation so that we can get started processing their file.  We receive a piece of documentation here and there while the closing date is getting closer.  Then within a few days of closing, the buyer provides the rest of the documentation so we can submit to underwriting.  Meanwhile, we are already within 3 days of closing which because of the TRID requirements, there is no way to meet the closing date.  Then the buyer is mad, frustrated, and complaining while the closing date is missed.

You would be surprised by how many buyers choose scenario 2!  Now we will still pull off a lot of these on-time because we push hard on our end to make things happen for our buyer.  But wouldn’t it be better to be the buyer in scenario 1 where we have documentation and time to provide an early loan approval and a stress free closing?  Of course you would!  Our Team Move process works so well for you as a buyer but also for Realtors and even sellers because of our expedited process, efficiency, and expertise.

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Author: Russell Smith

Team Move OVM Financial loan officer success is Russell’s primary focus. He provides the tools and techniques he used as a top producing loan officer. Additionally he offers the Team Move OVM Financial Agent Training Program. Sharing is so important to Russell so he works diligently to be a resource to loan originators and Realtors.