If you’ve ever asked a real estate agent to show you houses without being pre-approved first, they may have given you a look that says, “You want me to work for FREE?” and, yes, we’ve all been jaded by that Very Serious Buyer who just wasn’t serious enough to get pre-approved. But, from the perspective of a REALTOR®, there is more at stake than wasting our Saturday afternoon. Here are three important reasons to have that pre-approval letter before you go house hunting.
- With mortgage calculators widely available online, you can get a good idea of how much house you can afford, but there is no substitute for a pre-approval letter from a lender you have had a conversation with. For example, an app may correctly calculate a price point, but it can’t suggest the best possible loan for your situation. A real-life lender would, for example, let you know if you could go to a higher price point if you waited a few weeks for your credit score to rise, or if you need to buy NOW before interest rates rise or you’ll be priced out of the market (both situations my clients have encountered). A good lender will consider your entire financial situation to get you the most accurate price and best loan package, as well as other detailed information that could be game-changing. A computer can’t do that (and, by the way, I’m not a fan of those internet lenders either).
- More and more sellers are requiring the pre-approval letter as part of the contract and will not accept an offer without one (some even require it just to SEE the house). In the current multiple offer environment, buyers want to do everything possible to strengthen their offer! Don’t let the absence of a pre-approval letter be the reason a seller picks another offer over yours.
- Most importantly, having that trusty pre-approval letter helps your real estate agent protect your earnest money. If you are getting a mortgage, your agent will use a financing contingency that details the type of loan you will be using (e.g., Conventional, VA, FHA, USDA), when you will apply for the loan, and the total amount of down-payment. Your agent only knows this information from the pre-approval letter you have furnished her. If a real estate agent does not have the pre-approval letter for reference, she may include erroneous information in the offer, which is where things can get dicey.
Once an offer is accepted, it becomes a legally binding contract. If any of its information is incorrect (e.g., loan type, amount down, etc.), Buyer must get Seller’s written permission to change it, even if there are perfectly good reasons to make those changes. Maybe Buyer was denied a conventional loan but can qualify for an FHA loan; or maybe the contract was written with a 10% down-payment, but Buyer forgot to factor in 3% for closing costs and can put only down 5%. Seller’s written permission is required! If Seller agrees to the changes, everyone moves on with the transaction, but what if Seller has a back-up offer and says no? Sure, the financing contingency would protect the Buyer’s earnest money, but Buyer would lose the house along with any money already spent on inspections. The last thing we want is to depend on the good graces of the seller, so let’s get that offer right the first time! This is why it is important to have a pre-approval letter from a lender who has fully vetted your financial situation.
“But how would the seller even find out?” you may ask yourself. Idaho’s contract states that the buyer must “furnish Seller with a written confirmation showing lender approval… subject only to satisfactory appraisal and final lender underwriting” within a certain timeframe (usually 10 days). This provision of the contract makes it difficult for Buyer to change anything without Seller’s knowledge. If somehow a buyer sneaks something past the seller, the Buyer is still in default. If Seller learns Buyer has defaulted, Seller has the option to terminate the contract and keep the earnest money. Don’t risk it!
Talking with a lender and getting a pre-approval letter is an easy, yet essential, first step toward buying a home and protecting yourself during the process. Using a REALTOR® who knows the law and plays by the rules is just as important. But if worse comes to worse, remember that an agent works in your best interest, so we always have our clients’ backs. On that note, I’m proud to say that no client of mine has ever lost earnest money!