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When my clients make an offer on a house, I always advise them that we need to have a pre-approval letter from his lender along with the offer in order for the offer to be accepted by the seller. 

This was true when lenders were giving away loans like there was no tomorrow, and this is even more critical now a days when the lenders are going thru loan applications with a very fine comb.  Sellers want to have the confidence that a buyer are financially qualified to purchase their home before they accept the offer.

My clients will then ask me what is a pre-approval letter.  I can generally give a good explanation but I am really glad to read an article by a mortgage broker on a leading real estate site explaining the three types of loan letters which is listed below:   

• Pre-Qualification Letter: Loan Officer pulls credit, and inquires about income and maybe bank information. From that the Loan Officer makes a quick determination as to whether the Borrower could possibly qualify for a Loan up to a certain dollar amount.
  
• Pre-Approval Letter: Loan Officer pulls credit, inquires about income and bank information, takes a full Loan Application, may or may not collect some documentation like paystubs. Runs all this information through Underwriter or Loan Processor along with a hypothetical Sales Price, and looks for an Approved/Eligible or Accept.
  
• Loan Commitment Letter: The Loan Officer does everything that he or she would do if there was a property, pulls credit, collects all necessary documents, Borrower signs a Loan Application along with disclosures, and everything is submitted into Underwriting. Everything that would be done for an actual Loan would be done except for an Appraisal, because there isn't a property yet. The Underwriter then issues a Loan Commitment Letter up to a certain dollar amount, based on a property being able to appraise later once a property is found.

Part of valuations the lenders does is to figure out the debt to income ratio a borrower has which equates to all debt payments a buyer has to make each month vs their income allowing lenders to know whether a buyer can comfortably afford a loan or not. 

This is also the reason why there needs to be a loan contingency period allowing time for lenders to do detailed check on the borrowers before they will commit the fund to the purchase.  Only after the lenders is committed to make the loan can a loan contingency be removed.

Any more detail?  Ask your Mortgage Broker :-)

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Sylvia Barry, Realtor, ePRO
Marin Realtor for Marin Real Estate
Marin, San Francisco North Bay
Frankk Howard Allen Realtors
website: www.SylviaSellsMarin.com
Blog: www.AllAboutMarinHomes.com

 MARIN, SONOMA, S.F. BAY AREA REAL ESTATE - Beveldere, Corte Madera, Greenbrae, Kentfield, Larkspur, Marinwood, Mill Valley, Novato, San Anselmo, San Rafael, Sausalito, Tiburon; Cotati, Penngrove, Petaluma, Rohnert Park, Santa Rosa. Starter Home to Luxury Property. REO (Bank Owned), Short Sale, View Homes, Architecural Distictive Homes. Investment, 1031 Exchange. Chinese Realtor.