Shopping for a new home can be a complicated process and there is an abundance of useful information available online, advising would-be buyers on how to improve their chances of success. One of the more commonly mentioned first steps is for the potential buyer to obtain a mortgage preapproval letter, however, any qualified real estate attorney will take the representations made in this letter with a pinch of salt. The letter’s purpose is to indicate to a real estate agent whether or not the potential buyer qualifies for financing on a home, and the extent of financing for which they qualify. Eliminating potential buyers without a preapproval letter should, in theory, save the real estate agent time as they hope that this process would leave them with only serious contenders. Unfortunately, these letters come in many shapes and forms, often without any real guarantees of the potential buyer’s creditworthiness.
Prequalification Letter Vs. Preapproval Letter
First, a distinction must be drawn between a mortgage prequalification letter and a preapproval letter. The process for obtaining a prequalification letter is generally informal. The potential buyer may contact the lender over the phone and verbally provide estimates about their assets, liabilities and income. Following this, the lender will provide a rough estimate of how much financing they would be willing to make available. It’s important to note that they can only make this estimate based on information provided by the potential buyer and there is no verification process at this stage to determine whether they’re sharing complete and accurate information. Due to the lack of verification, the main advantage of this letter accrues to an honest potential buyer who simply wants to know what they can afford in terms of houses – a real estate agent or real estate attorney would place little significance on it.
Obtaining a mortgage preapproval letter requires the potential buyer to jump through a few more hoops. With this letter, the lender will perform a credit-check and will verify the information provided about assets, liabilities and income by agreeing it to the relevant documentation such as bank statements and employment contracts. The lender will specify an amount that they would be prepared to lend as well as the interest rate charged, and this offer will be valid for a certain time period.
Despite the preapproval letter granting a real estate estate agent a higher level of assurance over a potential home buyer’s ability to raise financing, it should not be relied upon as a guarantee; in some cases, it can even give agents a false sense of confidence. Most preapproval letters are conditioned upon many items being met successfully before the lender will give a firm mortgage commitment.
A Real Estate Attorney’s Red Flags
Unfortunately, mortgage preapproval letters don’t take into account the risk that a potential buyer’s financial circumstances might change. Furthermore, if assets and income aren’t stable and continuous, they will not be classified as verifiable and this could ultimately result in the rejection of the actual loan application. While the agent has no responsibility to resolve the potential home buyer’s financial woes, they should at least be aware of some common issues that could arise. These are some of the main red flags that real estate agents should look out for and consider in conjunction with the mortgage preapproval or prequalification letter:
- Evidence in credit report of disputed accounts or late payments on installment loans
- Recent changes in employment or being self-employed for under 2 years
- Long gaps in employment history
- Alimony payments reflected in tax returns
- Significant fluctuations in base pay between years
Any real estate agent who is serious about closing a deal will do all that they can to make themselves aware of the potential buyers’ financial position to ensure that their chances of obtaining finance are beyond reasonable doubt.
Consult with a Real Estate Attorney
At the end of the day, a real estate agent’s focus should be on presenting a property in its best light and attracting as many potential buyers as possible. The finances of these potential buyers can be somewhat of a black box and consulting with a real estate attorney can make a world of difference. The professional team at Gary I. Handin, PA, is available to guide you through the process and help you ensure that the “for sale” sign soon reads “sold”.