Let's say you have found the home you want to own. You think you are in a good position to negotiate a favorable terms with the seller. Your lender provides you with a "Pre-qualification" letter to include with your offer. This is what the lender gives you---boiler plate:
Based on the information you provided and not yet verified, it appears you may meet the requirements to qualify for a mortgage with us....This is not a commitment letter, and a commitment letter may only be issued after verification of your income, assets, and credit report. We will also need an accepted offer and an appraisal of the property supporting the purchase price. After all of this information is submitted and we have a complete file we will submit the package to underwriting for review....
Your offer is submitted to the seller of a property with an asking price of $295,000. You offered $285,000. The seller sees your offer and your non-committal letter with no indication of an amount you may be "pre-qualified" for (based on information not verified). What do you think the seller might be thinking?? If you guessed "WTF???" you are right.
Let's say the loan officer wanted to "help you negotiate" so while you have asked for a pre-approval of a maximum purchase price, the lender gives you a price that he thinks is will help protect your negotiating position. He includes a dollar amount below your actual maximum and makes it for the amount of the asking price of the property you are trying to buy:
We have pre-qualified you for a purchase price of $295,000. Put yourself in the seller's shoes; what thought does this trigger in the seller's mind?? YES! You are right! "Ah, these people are barely qualified, if they are qualified, and any tiny change will sink this ship. Give me a better buyer please!"
The wise alternative is to take the time, before starting to look at properties, to get an actual preapproval letter from a lender by providing all of the information you will need to provide anyway. Do that and a version of this is what the lender can provide for you:
Congratulations. You have completed the steps of the mortgage loan application with our bank to be approved for a maximum purchase price of $325,000 as required by our underwriting guidelines. Your credit report, income, and deposits on hand have been verified. Once we have an executed purchase agreement and an appraisal of the property supporting the purchase price, we will submit your application to underwriting for final approval.
Your offer of $285,000 AND this letter are viewed remarkably differently by the seller. $285,000 might be a little less than they wanted, but you are the buyer they need---SAFE. You are approved and you are well within your budget. It's much harder to take the chance to counter your offer because now their is the risk of losing the GREAT buyer.
Yesterday, (and time and again I hear this) a lender told me he didn't want to include a maximum dollar amount to help us negotiate. Goodness gracious, if we end up in competition with a person with the smart letter, we may not get a chance to negotiate. Information is key in negotiating and we have to use the information we have to help our position. Holding back on showing how strong we are would be like the seller not showing us they have brand new appliances in the kitchen, or the roof is new, or the HVAC system is new.
Does this make sense? OK, you are thinking "If the seller knows I can afford more they will want more money." First of all, I doubt it because the need to have a strong buyer trumps the risk of squeezing a buyer for a fraction more money. Secondly, if you know the values and you know what you should pay, it doesn't matter if the seller holds out for a price that you don't want to pay. You're not going to pay what you won't. Thirdly, I bet you think a CASH offer is attractive, right? Wouldn't that attractive cash offer also suggest to a seller than you have $ and they should then squeeze you for a few dollars more?
Go out today, find your lender, and do the process of Pre-Approval. Then, get the letter that tells the seller everything they need to know about you to say "We found the buyer of our dreams!"
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