Is Your Preapproval Letter Ready for an Update?

Written by Posted On Monday, 21 December 2020 00:00

In today’s real estate marketplace, sellers want to see a preapproval letter along with your offer. Gone are the days of a simple prequalification, it’s the preapproval that needs to be witnessed. Is there a difference between a prequalification and preapproval? Yes. It’s a matter of verification. A prequalification letter can be issued to just about anyone with a phone conversation. The loan officer will ask about your job, income and assets among other things and make assumptions about the credit profile. But the job, income and assets are not verified, and neither is credit. 

‘Prequals’ used to be the norm but now it’s the preapproval letter that reigns. A preapproval letter will typically show what has been reviewed and verified by the lender as well as having a credit report credit scores reviewed.

One of the very first steps when getting ready to shop for a home is to obtain this preapproval letter. You’ll be asked to provide verification of your pay with copies of your most recent paycheck stubs and copies of bank statements showing there are sufficient funds to close the transaction. Sufficient funds includes amounts reserved for a down payment, closing costs and some left over referred to as ‘cash reserves.’ You can submit a loan application or sign a credit authorization form that lets the lender pull your credit information. From this, a preapproval letter can be issued.

Yet most don’t find a home right away. Instead, with preapproval letter in hand, future buyers begin shopping for a home to buy. It might take a month or two or even more to find the right home. When it’s time to make an offer on a selected property, the sellers and the seller’s agent want to see your preapproval letter. If the letter is a few months old, they might want an updated one. It’s pretty much the same process lenders go through when processing a loan. C

redit documents in a loan file which include income and asset documentation as well as a credit report need to be less than 30 days old. When they get past the ‘freshness date’ lenders will want updated paycheck stubs and the like.

Why? Because a lot can happen over the course of two or three months. A drop in income due to a temporary layoff. Large purchases such as an automobile along with its new monthly payments can affect debt-to-income ratios. This is one reason why lenders will order one final credit update right before closing documents are ordered and the loan funded.

There really is no need to obtain a preapproval letter if the date is somewhere around 30-40 days old but if it’s two to three months old, don’t be surprised if a seller’s agent asks that you provide an updated letter. It’s a relatively simply process, just contact your loan officer and tell them the sellers want to see a fresh preapproval. You’ll be asked for updated documents, but a new preapproval letter can be revised and updated same-day.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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