A prequalification letter from a lender isn’t worth the paper that its printed on. I know that sounds harsh, but it’s true. When you list that property for sale and you are trying to determine which offer you should choose, it’s not all about price. Close-ability is also a huge consideration. Can and will the prospective buyer actually sign the closing documents? Will their lender actually approve the deal?
When a lender makes an underwriting decision, they are actually making a decision on two different things – the borrower and the property. A preapproval is granted when a lender has gathered all of the necessary documents on the borrower to approve them. They will have already signed off on the borrower’s credit and income. All they now need to do is to underwrite the property itself. When a lender provides you with a preapproval letter (if the lender has done their job) they should only need to underwrite the property.
A prequalification letter, by contrast, provides you no such comfort. It simply means that the lender thinks that they will qualify. The lender has not yet checked the client’s income documentation or possibly even their credit report. A prequalification really provides you very little assurance that the potential buyer can obtain the financing necessary to complete the deal.
Getting an offer is exciting. What happens if another offer doesn’t come in? It’s important that before you accept any offer, you must be assured that the person making the offer has the ability to consummate the transaction. Before you pull that property off the market, make sure you’ve done your due diligence on the borrower. It’s a lot better than pulling a property off the market only to discover a month later that they didn’t have the ability to close to the deal in the first place.