Sellers, Should Your Buyer Be Pre-Approved or Pre-Qualified?

Within days or weeks of putting your home on the market – if it’s priced right and marketed effectively – you should have a steady stream of showings and questions and at last a written offer.    A review of the offer terms and conditions will tell you if the buyer is in the ballpark and someone you want to work with. Of course, the perfect offer is full price, all cash in escrow and no contingencies . . . but what is more realistic is an offer with terms and conditions that you’ll need to work with or negotiate to something that suits you better.  

The contingency that usually takes longest to fulfill is Financing, where the buyer has a period of time to secure financing or else they can walk away from the deal and take their escrow with them.   This could leave you, the Seller, possibly 30 days after coming off the market, having to change your listing back to “For Sale” from “Pending” and risking looking like damaged goods, as well as having to start the whole sales cycle again.  

The age old saying about failing fast is true in real estate sales, if a transaction is going to fail, you want to know as soon as possible.  

Most agents will ask for proof of funds when receiving an offer – straightforward for cash buyers but what about for a Buyer that needs financing, do you care if a Buyer is Prequalified or Preapproved…well it makes a difference, so you should.

Why Does It Matter?

Preapproval and Prequalification are not the same, and essentially represent different stages in a Buyer’s financing process.  As a Seller you want a Buyer to be as far along as possible in the Financing process before making an offer on your home.  Each step forward the Buyer takes to getting financing reduces the opportunities for them to be denied.    

What’s the Difference?

Prequalification is at best an indication from the lender that they want to do business with the Buyer, based on what the Buyer has told the lender about their income and expenses and assets and liabilities.  Typically, there is very little validation by the lender for a prequalification. Preapproval, on the other hand, indicates the lender thinks the Buyer can afford to buy a home to a specific value – not necessarily your home – and the Buyer has provided some proof of income, expenses,  assets and liabilities. The key difference is preapproval requires some level of documentary proof from the Buyer. Whilst not even close to a loan commitment, preapproval is clearly steps ahead of prequalification and is preferable for a Seller.

What Could Possibly Go Wrong?

As a Seller, always request preapproval over prequalification and as a Buyer, make your offer look stronger by providing that preapproval letter from your lender.  Whether you are a Buyer or a Seller, know that there is still a lot of discovery by the lender on the Buyer’s financial situation as well as the home they intend to purchase, and there are still factors that could prevent that final loan commitment, here are some:

Buyer Issues

  • Unstable income (eg. tips, commissions) may be disallowed
  • Insufficient cash to cover the loan down payment or an unexplained large deposit to the Buyer
  • Loss of a job or unstable employment history
  • Deferred student loans or recent judgements  

Potential Issues the Seller Can Help With  

  • The home may not appraise at the agreed purchase price  (Price it right)
  • HOA or COA dues may not have been factored into ongoing income and expenses (Give as much information as possible up front)
  • An accurate insurance quote may not have been factored (Be transparent with your insurance costs)  

Until a Buyer receives a loan commitment to purchase your home at the agreed price, then financing is not a 100% certainty, but preapproval is a good step towards getting that loan commitment.  Different lenders have different criteria for issuing preapprovals so ask questions about what level of diligence has been done to get the preapproval.

Buyers, take that extra step and increase the chances of your offer being accepted.  Sellers, know the difference and ask questions.

As ever, if you are looking for assistance buying or selling real estate in St Petersburg or the Southern Pinellas Beaches, then contact me today.