Our friend Scott Shafman with The Shafman-Jacobs Group/Cornerstone Mortgage here in St.Louis is on the show again helping position buyers to get the upper hand when making an offer on a home.
One of the things buyers will typically do is obtain a preapproval letter or a loan commitment letter. Scott Shafman explains the difference and tells us which one is more effective.
Usually, a preapproval letter is created in two ways. A loan officer may take your application over the phone, or you may fill it out online yourself and the information will be compiled by the loan officer later. An automated system also exists, but this method is not recommended because of it cannot generate a proper pre-approval letter.
When the loan officer gets the information via the phone or internet application, he will pull credit reports, research job history, determine income, and see if the buyer qualifies for credit. Nothing is verified with hard data. The pre-approval letter is a verbal good faith approval based on trust.
The important thing to note is that even if the buyer is pre-approved, it doesn’t mean they’ll be approved for a loan when it’s time to complete the sale.
Loan Commitment Letter
The loan commitment letter is based on details like the price of the home and the amount of the down payment. Credit reports, job history, and income are not just declared, but verified and approved. In this case, the lender starts underwriting the actual loan and issues the loan commitment letter to the buyer.
There may be four or five offers on a home in a seller’s market. Any type of competitive advantage you have going in to make an offer on a home will help you out. If four potential buyers have pre-approval letters, and one buyer has a loan commitment letter, the sellers will lean towards the loan commitment letter. This is because the buyer is already approved. If you’re a buyer preparing to win in a hot market when buying a home, a loan commitment letter is the surest way to put your offer at the top.
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