Important Letters You Need when Buying or Selling a Home

If you're buying a house, you'll hear a few different terms as you go along through the home buying process. If you're selling a house, you'll want to be aware of these terms as well, because it could make all the difference in the world if your transaction goes smoothly or not.

There are generally three different words you'll hear when it comes to the important letters that will be submitted to you, pre-qualification, pre-approval and commitment. We'll go through all three types so you'll have a better understanding of what each one means.

The Pre-Qualification Letter: Also known as the "pre-qual" letter. This is the one you really want to steer clear of if you see it come across your table and you're selling. A pre-qual is basically when a potential buyer contacts a lender to get an idea of what they can afford for a loan. The lender will take the buyer's information, such as income, bills, savings and checking account information as well as any investments they might have. They will ask for work history, and rental history. Sound good? No, it's not. Buyers can lie, and some of them do. The lender does not do a hard credit check or verify any of this information; they will however draw up a letter saying the buyer is "pre-qualified" based on the information that has been provided.

The Pre-Approval Letter: This is a lot more solid than your pre-qualification letter. The buyer has contacted a lender, provided their information, but this time the lender has checked their credit and verified their information. This is the most common, and this is the one you want. You can get a pre-approval for free from most lenders, and if one decides to charge you, I would be tempted to search for a new lender. If you're selling, and you see this letter come in with your offer, it's ok!

The Commitment Letter: This is the ultimate goal of your transaction. If you're buying, you'll have several forms to fill out, and information you'll need to provide to your lender. If you're a seller, you still want a commitment letter because this means the lender has committed to giving "your" buyer a loan on "your house." This is property specific. The lender will send out an appraiser, and chances are your house has appraised and is worth the loan amount. You will not receive a commitment letter until your house is under agreement and the bank has verified that it is worth what the buyer is paying for it. This, generally speaking, will come roughly a month after your home has been on deposit, but will vary greatly considering any special circumstances. Your original offer will typically have a "commitment" date on it, which will provide a timeline for you when you can expect this.

If you're buying a house, it's in your own best interest to get pre-approved before you start looking. You don't want to look above your price range, as that will lead to disappointment. If you do find a house you like, and find that you cannot get pre-approved, it will be even a greater disappointment! If there is something that prohibits you from getting a pre-approval, your lender will be able to tell you what it is, and counsel you on how to correct it so that it won't become an issue if you decide to purchase in the future.

If you're selling your house and receive an offer, my best advice that I give to my clients is, don't sign anything until you see a pre-approval! If you sign the offer, you get yourself into a contract to sell without actually knowing if your buyer is able to buy. It can get to be a tricky situation if you hold your house off the market only to find out your buyers were not able to secure the loan.

Even if you do receive a pre-approval, there are no guarantees. The house needs to conform to your loan conditions, or circumstances might come up in the middle of a transaction that will prevent you from getting your commitment. As with anything, good communication with the lender is key to avoid any potential problems! And as a side note, if you're buying a home, and have one under contract, now is not the time to purchase a new vehicle or quit your job unless your lender tells you that you can!