Lender Letters – FAQs

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Lender Letters – FAQs

A “lender letter” is a letter, on company letterhead, from the buyer’s lender. It indicates that the lender is, conditionally, willing to provide the buyer a specific type of mortgage, up to a particular loan amount, at a particular interest rate, with a particular term (i.e., number of years).

A lender letter rarely will convey a guarantee. The letter will almost certainly include conditions that must be satisfied before a mortgage for the buyer would be approved.

From a seller’s standpoint, a lender letter is essential for an offer to be credible. Without a lender letter, you can’t even guess whether a prospective buyer can ultimately qualify for a mortgage loan. If it turns out they can’t, the downside for you as a seller is you will have taken your house off the market for however long the financing contingency is the contract – that might range anywhere from a few weeks to a couple of months, depending on what was agreed.

Obviously, a lender letter isn’t applicable if the buyer will be making a purchase all in cash. But, if that’s the case, you’ll want to see copies of most recent financial statements plainly indicating the prospective buyer has more than enough cash on hand for the purchase.

From a buyer’s standpoint, a lender letter is essential to include with an offer to buy a house. Otherwise, the offer will, more than likely, not be taken seriously. And, for good reason – the lender letter is evidence that the prospective buyer has at least begun the mortgage approval process with a specific lender and appears to have some probability of being approved.

Roughly speaking, there are two levels of lender letter:

Weak – This letter, sometimes referred to as a “prequalification letter,” will essentially say the buyer will be approved assuming the buyer’s income and assets are what the buyer has indicated they are. Imagine a buyer has gone to an online mortgage company’s website and input their social security number, income information, and asset information. The company will run an automatic check on the person’s credit – probably only looking at their credit scores. Beyond that, the company hasn’t yet done anything. So, there’s no telling whether the self-reported information for income and/or assets is accurate.

Strong – This letter, sometimes referred to as a “preapproval letter,” clearly indicates that the lender has already verified the buyer’s credit, income and assets. In other words, the lender will have already taken the mortgage application at least partially through the “underwriting” process, meaning they have run the buyer’s credit report and received from the buyer, and analyzed, the buyer’s tax returns and/or pay stubs, and financial statements. If the letter does not explicitly say the lender has verified anything, then it should be assumed the lender has not.

From a seller’s standpoint, the “strong” letter is much preferred. However, you’ll often find lenders that will only provide a “weak” one – as a cost-saving measure, they want to keep costs down by putting off any underwriting effort until after there’s a ratified contract.

From a buyer’s standpoint, to be sure you can obtain a “strong” lender letter to submit with any offers, you should ask lenders you’re considering – before you’ve committed to one – whether they’ll provide such letters. Specifically ask them whether they will provide a letter that explicitly indicates they have verified your credit, income and assets. If they say no, or attempt to argue this isn’t necessary, I would encourage you to consider other lenders who will.

A prospective buyer should obtain a fresh lender letter for any offer about to be submitted. The purchase price and mortgage loan amount should exactly correspond to the offer about to be submitted. And, the lender, once they’ve done their upfront work to verify a buyer’s credit, income and assets, should be able to issue a fresh lender letter within only a few hours notice.
By | 2017-01-26T10:39:20+00:00 December 1, 2016|Buying & Selling Tips|