The Preapproval Letter Defined

The preapproval letter is a tool typically drafted by a loan originator to be used by a buyer's real estate agent when presenting an offer on a property.   The letter may be in the form of a certificate or be an actual letter on the lender's letterhead.   The preapproval letter is intended to assure the seller and the listing agent that the buyer has been buyer has been approved by the lender and therefore accepting an offer from this buyer, there should ideally not be any financing issues with the buyer.

When I prepare a preapproval letter, it usually contains the following (depending on the program):

• Effective date.
• The borrower's names (who is approved for financing).
• The sales price and loan amounts they are approved for.
• The type of financing is confirmed (ex. Conventional, FHA, etc.)
• Credit has been reviewed.
• Employment and income has been confirmed.
• Down payment and closing cost have been verified.
• Any closing costs that are being requested to be paid for from the seller.
• Any item the preapproval is subject to (such as satisfactory appraisal, title, complete purchase and sale agreement, etc.).

If these items have not been actually verified with proper documentation, then a buyer has been prequalified-not preapproved.  BIG DIFFERENCE.  Being prequalified essentially means that a verbal interview has been conducted without providing all of the necessary supporting documents (pay stubs, W2s, bank statements-again, depending on the type documentation required for the specific loan "full doc" to "no doc").  In addition, a Good Faith Estimate does not constitute a preapproval, it does detail the proposed loan scenario.

The preapproval letter does not contain private information such as a buyer's credit score or their additional assets.   It is a sales tool for the buyer's agent and if there are multiple offers presented on a home, having a strong preapproval letter is an advantage.   This is one reason why it is crucial for buyers to become preapproved before they begin shopping for their next home.   Many listings agents will not even consider an offer unless the buyer has been preapproved.    

The preapproval letter is generally effective for 90 days, which is when most lenders consider the credit report "expired".   Updating a preapproval letter is simply re-running the credit and possibly obtaining most recent income and asset documentation (paystubs and bank statements).    On occasion, the buyer's agent may request a revised preapproval letter if they are presenting an offer on a home that is priced for less than what the buyer is approved for and if they are asking for closing costs.   

Real estate agents may also consider who the preapproval letter is from, and they may contact the lender to confirm the buyer is indeed prepproved and not just prequalified.   Many agents will tell you that the preapproval letter is only worth the paper it's printed on.   This is also why it's very important to be selective with lender you work with...it could possibly impact whether or not your offer is accepted on your next home.