If you are searching for a home this spring, you’ll need a prequalification letter to prove you have your finances in order. Without one, your offer to buy a home is likely to fall flat, very flat.
So, what is a prequalification letter (aka “prequal”) and why is it so important? Let’s take a look at three different perspectives to understand how this one document can play such an important role in kicking off a real estate transaction.
Prequalification letters guide the mortgage borrower
The term “mortgage borrower” refers to you. When you purchase a home, you will likely require a mortgage and therefore, you will become the mortgage borrower. So how much can you actually borrow?
While we could break out the calculators and scratch paper (or Excel), there is no need to because the lender handles it all. Said another way, the lender that prequalifies you will ask a series of questions and obtain your credit report. This process allows the lender to create a prequalification letter that includes, among other things, your maximum loan size.
Note: While the maximum loan size is great to know, please do not confuse it with being anything other than just that – a maximum. Be sure to budget your own finances to ensure you can comfortably manage your new monthly mortgage payment.
In summary, a prequalification letter for a mortgage borrower provides the confidence to know (preliminarily) that they can qualify for the mortgage amount needed to purchase a particular home.
Realtors identify serious shoppers
Having a prequalification letter in hand when first connecting with a Realtor indicates you have done your homework and are a serious shopper. Without a prequal letter, there is virtually no way for a Realtor to confirm (or deny) your ability to purchase a home.
This is important because a Realtor has just 24 hours in a day and 7 days in a week (just like you and me). Despite the fact that the best Realtors make us feel like we are their only clients, they are often juggling multiple transactions simultaneously.
Realtors need to be selective with their time. Home shoppers that show up with a prequal in-hand will always get more attention than those that show up empty-handed.
Sellers look for prequalification letters
We are currently in a seller’s market, where high competition exists for a limited supply of homes. Based on this, home sellers will likely receive multiple offers from a range of prospective buyers.
When a seller receives multiple offers simultaneously, one would think that the highest priced offer always wins. While that may typically be the case, other factors, such as down payment amount, loan program selection and other contingencies are also compared to determine the likelihood of a smooth transaction.
Tip: Contingencies are conditions that must be met prior to the sale of a property. While many contingencies are negotiable, standard ones include a buyer’s home inspection and the buyer successfully obtaining a loan or financing to purchase the property.
When a seller is evaluating a range of offers, any offer lacking a prequalification letter will be devalued regardless of the purchase price offered. As a matter of fact, it is virtually a requirement these days that an offer to purchase a property include a prequalification letter.
Wondering if all Lenders offer the same interest rate? Look here.
Concerned about increasing interest rates? Look here.