Help your clients recognize the importance of getting preapproved

John Osslund, president, West Coast Mortgage and S.W.I. Financial Services Inc.

As published in Scotsman Guide's Residential Edition, August 2006.

In today's real estate market, homebuyers are often advised to visit their lenders or mortgage brokers to find out how much they can afford before starting their home search. In the past, it was common for the broker to issue a prequalification letter.

Because loan officers do not approve loans, a prequalification is not a commitment to lend. A prequalification letter is often used when making an offer on a property because it indicates to the seller that the holder is qualified to purchase the house in question.

Today, with the power of the technology, an exemplary loan officer will instead issue a preapproval letter. Preapproval is a step above prequalification. It involves verifying credit, down payment, employment history and more, and it can have numerous benefits for potential borrowers.

Unlike a prequalification letter, a preapproval letter comes from a lender or loan officer after careful review of employment documentation, assets and credit, in addition to an automated-underwriting approval. Before providing a potential borrower with a preapproval letter, the loan officer submits a loan application to a lender, which then makes an underwriting decision.

In general, a preapproval letter should list the sales price, loan amount and the fact that the loan has been approved through automated underwriting. It should serve as an overall financial snapshot, accurately depicting the buyer's creditworthiness.

For buyers, the preapproval letter provides a tangible mortgage amount with down-payment percentage, mortgage insurance, property taxes and interest rates factored into the total. This often results in an accurate payment and total costs to close. With this information, buyers are well-informed as to how much housing money they can qualify for based on their income, debts and credit history.

An accurate preapproval letter signals to sellers that the potential buyer is qualified to make a housing purchase. As such, the seller can accept offers presented more confidently.

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