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Buying A Home � Dealing With Lender Letters
Most people who set out to buy a home, be it house, townhouse, condo, apartment, or mansion on a hill, know they need to have a lender letter in hand saying they are qualified for a loan. What most �civilians� (people not in the real estate business) don�t realize is how much the value of a lender letter varies.
Let�s look at some of the general ways a lender letter varies, which sort you want, and how to present it to a seller to put you in the best possible position to buy that seller�s property. If you�re working with a broker, he or she will coach you in these matters. If you�re shopping on your own, and especially if you�re looking at FSBOs (for sale by owner properties), you need to know this stuff.
Lender letters come in two general types, pre-qualification letters and pre-approval letters. The bold print on the page may call it one thing, and when the letter is read, it actually proves to be the other, so pay attention. A pre-qualification letter is weaker than a pre-approval letter.
The weakest pre-qualification letter basically says that �if everything the borrower has told me is correct, he/she is eligible to borrow $XXXXXX.� What">All you really have here is the buyer�s word paraphrased by a lender. Unfortunately, there is an old adage in real estate that �buyers are liars�. This is well known, so presenting this type of a letter tells a seller you are not in a very strong position with the lender.
A stronger version says �I have looked at an �in file� credit report, and based on that and what the borrower has told me, he/she is eligible to borrow $XXXXXX.� This is still not great, but it is a step in the right direction.
The pre-approval letter says �I have checked this person�s credit reports, seen all necessary substantiating materials relative to income�assets�etc., and my firm is committed to making a loan subject only to receiving a copy of a contract to purchase and the property�s appraisal for the contract price or higher.� The letter may not say it, but it is also subject to the underwriting process that includes looking at updated credit information. Regardless, this letter carries a lot of power and sellers will be very happy to see you.
A Word to the Wise
The above discussion of lender letters brings up something you should be keenly aware of as a buyer. Your credit must not change in any substantial way between the time you first apply for a loan and the time you go to settlement on your new home.
If you�re buying waterfront property, do not go out and buy a boat until after you�ve closed on the property. I once saw someone make this mistake and almost lose the property purchase because of it. He had to quickly find a new lender and accept a higher interest rate to keep the deal from going south.
If you�re moving from a small condo to a larger place, there�s the temptation to run right out and buy more furniture for your new quarters. Fine. Just wait until after you�re the proud new owner.
If you are serious about buying a home, a lender letter is a key part of your negotiating ammunition. To save yourself a lot of aggravation during escrow, get a pre-approval letter before you go house hunting.
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