Pre-Approval Letter

A letter issued by a lender stating that a buyer is "pre-approved" for a particular loan amount and purchase price. The term does not have an agreed definition and can apply generally to any such letter.

A Pre Approval Letter is Critical.

However, not every pre-approval letter is the same. There are three different types that vary in strength. Paricularly in a hot housing market, where there may be competing buyers, a smart buyer will make sure to get the strongest letter possible.

Pre-Approved is the Simplest.

In its simplest form, a “pre-approval letter" is based simply on what is reported by the buyer to the lender about their assets, debts, and income. These letters are often generated online. Because the lender is relying solely on what the buyer typed into the form (and the buyer was surely feeling optimistic!) there is a good chance that reality does not match. In other words, the letter notwithstanding, the buyer may not be able to actually get the loan. Accordingly, sellers do not give much weight to a pre-approval letter.

A Pre-Qualified Letter is Better.

A step up is the “Pre-Qualified Letter.” A pre-qualified letter is based on documents provided by the buyer to the lender. The loan officer (the consumer-facing employee of the lender) then uses those documents to confirm that the buyer is qualified for the sale price. This gives the seller at least some assurance that the buyer — and their offer — is legit.

A Pre-Underwritten Letter is Best.

The best of all is a “Pre-Underwritten Letter.” This letter tells the seller that the an actual loan underwriter has received and reviewed the buyer’s documents, and confirmed that the buyer can get the loan needed for the purchase. A “loan underwriter” is the person who actually reviews and approves — or denies — loan applications. So an offer that includes a pre-qualified letter is going to be considered the strongest, at least in terms of financing.

Read your Pre Approval Letter Closely to Confirm.

Because these terms are all fairly “loose,” your lender may not totally understand if you ask for a pre-qualified or pre-underwritten letter. When you get the letter, read it closely. It should say what the lender has received and reviewed, whether by an underwriter or not. So by the terms of the letter, if nothing else, you can determine the strength of the letter. And if needed, you can follow up to improve it.