Q: Does a real estate agent need to get copies of our preapproval letter from our lender before taking us to search for homes? My concern is that I make if an offer on a house, the agent would provide a copy of a preapproval letter from my lender that would give the seller the exact amount that I could pay for the home.
In particular, if my agent wants me to have a preapproval letter specific to a home, it will telegraph to my seller the exact amount I might ultimately be willing to offer or pay for a property. I don’t want my agent to tip off the seller about the maximum amount of my preapproval and cause the seller to hold out for a higher price, particularly now, with buyer demand so strong in many areas.
Is this a problem other buyers have faced?
A: You’ve hit on two really important questions: How much should your agent know about your finances? And how much of that knowledge should be telegraphed to other parties in the transaction?
In a typical home buying situation, you’d contact a lender, give the lender some general information as to your income, debts and savings, information on what it will cost you to close on the home, and finally what your monthly expenses will be when you live in a home.
With this information, the lender can ballpark how much you can afford to spend and might give you a pre-qualification letter that says you are qualified for a loan of up to a certain amount.
But a pre-qualification letter is not the same thing as a preapproval letter, although many lenders issue pre-qualification letters that look very similar to their preapproval letters. The difference is that with a preapproval letter, the lender should have vetted you, checked your credit, verified your employment and approved your loan, as long as the home appraises out in value. And, that’s the final step: Once you and the seller have agreed to the purchase price, and signed the offer to purchase, the lender has the home appraised, reviews the legal title to the home and schedules the closing.
With that in mind, the real issue is whether your agent should have detailed information as to what you can afford to spend and whether the seller should receive some confirmation about your financial ability to close on the home.
On the issue of the seller knowing, your purchase and sale agreement can say that you will provide information on your ability to close once the contract is signed. If the seller is insistent on getting something from you during the negotiation process, you can deliver information to the seller once the purchase price is agreed to but before the contract is executed.
On the other hand, your real estate agent should have some idea of what you can afford. There’s no sense in keeping your real estate agent totally in the dark — unless you’ve hired someone who would sell their soul to get a deal done. If you’ve hired a quality agent, they will know how to guide you through the home buying process and keep private information from getting into the wrong hands. If you don’t trust them enough with this information, you may have picked the wrong person to help you out.
Your agent doesn’t need to know the particulars of your finances but should know that you are looking for a $300,000 home and can afford a loan at today’s interest rates between $240,000 and $260,000, or something like that. That level of detail lets the agent know that you are fine looking at homes in that price range. Knowing that, your agent can also tell the listing agent that you have talked with a lender and have been pre-qualified for a home in that price range. It won’t mean that you’ll pay a specific amount; you’ll still pay what you want to pay, and the seller will still want to get as much from you as possible.
Even if the seller received a document showing that you can afford a $400,000 home or even had $400,000 in cash in a savings account, that doesn’t mean you have to pay that for the home.
Don’t worry too much about what the seller thinks. The bigger issue is how you play the negotiation game. So, in a seller’s market, sellers get the upper hand and have more influence in pricing, and in a buyer’s market, buyers have more control over pricing and typically pay less.
Right now, much of the country is locked into a seller’s market, where there are many more buyers than there are homes for sale. And at the end of the day, we think market forces will influence the transaction much more than any letter from your lender.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)
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