A preapproval letter provides documentation of exactly how much mortgage you have been approved to borrow. And this documented evidence shows both Realtors and sellers that you are serious in your pursuit of a property. A preapproval letter can make a big difference for homebuyers.
What’s included in a preapproval letter?
Here are the items typically included in a preapproval letter:
- Loan program
- Loan type
- Loan amount
- The purchase price
- The qualified interest rate
- How long the preapproval offer will last
An important aspect to all preapproval letters is that a preapproval letter doesn’t guarantee a home loan. The items specified in your preapproval can change for several reasons, including: your financial situation changes (you incur more debt, lost your job, etc.), the appraisal comes in lower than estimated, there was an issue with the title search on the property, or mortgage rates rise.
If items in your situation change, you can expect to go though the preapproval process again.
For example, the amount of mortgage you can borrow based on your income is determined by the interest rate of the mortgage. Should mortgage rates rise, the size of the loan you can obtain will shrink. Let’s say a borrower has an income of $6,000 per month, $500 per month in debt obligations and an expected $500 per month in tax and insurance costs for a property. That borrower can qualify for a loan amount of $247,164 at an interest rate of 4 percent, but only $239,866 with a rate of 4.25 percent. However, if mortgage rates do rise, you can usually retain the preapproved interest rate by paying “points,” which will add to the cost of obtaining the loan.
Similar changes can happen if your credit score should slip during the process – a lower credit score can mean a higher interest rate (or higher loan costs to obtain the rate at which you originally qualified).
Here is a sample of a preapproval letter:
When will I receive my preapproval letter?
A lender will draft your preapproval letter usually 5-10 business days after you've placed an application with them (except for any property information, of course). At that time, you'll provide the lender with authorization to check your credit, and you'll need to provide the documents that prove your income, assets, outstanding debts and that you have funds for a downpayment and closing costs. The lender or underwriter will then review these documents which will take a few days to complete, and they may ask for updates or clarifications during this time, too.
This article was revised by Keith Gumbinger.