Have you ever thought about those letters of pre-qualification that banks or other mortgage lenders provide to buyers of real estate? Have you wondered what a letter like that means to you if you're planning to sell a house and you are approached by a buyer?
A pre-qualification letter does not really provide much assurance to you as the seller. It may be slightly better than nothing at all, but it certainly does not tell you that a buyer is qualified to purchase your house. Really, the only thing you know when you see one of these letters is that a particular buyer may be able to get a mortgage loan, but there is absolutely no guarantee that I can sell my house fast every time.
I'll begin by describing a pre-qualification letter and a pre-approval letter, two entirely different types of letters, despite the fact that their names sound similar. A pre-approval letter is by far the better of the two because it shows you that a lender has verifed income, savings and credit history of specific buyers. But a pre-qualification letter, by contrast, is available by completing a form, usually online, and there is no verification involved. Banks often provide pre-qualification letters without meeting or researching the buyer at all, so they simply don't mean much whenever you learn how to sell a home.
Basically, a pre-qualification letter tells you one thing; it tells you that the customer filled out a form, and that's about it. I'm sure that probably doesn't sound too encouraging when you're thinking about selling a house, but it's just the truth. I don't care about pre-qualification letters because they don't help me at all whenever I sell a house.
But when I see a pre-approval letter verifying that a certain buyer has made it thorough a preliminary level of the mortgage approval process, I must admit that impresses me a bit more. The pre-approval letter states a maximum loan amount and a specific expiration date of the offer, both being important because I know if the buyers are in the market for a house in the same price range as my home, and I know how recently they were verified. All that information is valuable to sell a house. But bear in mind that a pre-approval letter is simply not a guarantee of any kind, it's just preliminary.
A guarantee is called a loan commitment, another letter that buyers receive once there's been a much more thorough review of their credit worthiness. And, in addition, an appraisal on the house will be required by the lender. That's why buyers cannot approach you with a loan commitment letter, it simply wouldn't happen. A loan commitment is made for a specific property, so a loan commitment letter happens at the end of the mortgage loan application process, not at the beginning. It's easy to get confused with these terms that sound similar. But just remember, a pre-qualification letter is basically a sales technique to get buyers to start working with a lender upfront, before they find a house to buy.
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