Getting a preapproval credit letter feels almost like getting accepted into college or receiving a job offer. It’s a validation that someone trusts you enough to welcome you into their financial community. The satisfaction of receiving this letter is real, especially since the preapproval process typically takes anywhere from 2 to 5 weeks.
But similar to starting college or a new job, the real challenge begins once you accept the terms. After getting preapproved, you need to start house hunting, make an offer, hope it gets accepted, go through all the contingencies, sign piles of paperwork, and be ready to handle a mortgage.
Let me show you what a preapproval letter actually looks like after I spent weeks providing endless documents to the lender. Finally, they sent me an encrypted email containing the preapproval credit letter:
– The preapproval mortgage amount is $1,700,000, with a target purchase price of $2,800,000. I need to make a down payment of $1,100,000, which sets the Loan-To-Value ratio at 60.71% ($1.1M / $2.8M). The loan type is a 7/1 ARM, offering a super low 2.125% interest rate.
In the past, I would have opted for a 5/1 ARM because it gave the lowest rate with a comfortable fixed period. However, these days, the 7/1 ARM is more appealing due to the flattened or inverted yield curve. You get two extra years at a fixed rate and a lower mortgage rate compared to the 5/1 ARM or a 30-year fixed-rate mortgage.
The monthly payment for my $1,700,000 mortgage at 2.125% is just $6,390.33. Back in 2005, I bought my first home for $1,525,000 with a $1,225,000 5/1 ARM mortgage at 4.75%. Even then, my monthly payment was $6,390. It’s incredible how rates have dropped, allowing me to borrow an extra $500,000 now for the same payment amount.
Greater wealth is definitely driving demand during these uncertain times. Over the past 15 years, incomes and net worth have soared for many, making lower mortgage rates and greater home equity significant factors in today’s market.
While I qualified for a 2.125% rate due to relationship pricing with my lender, even if you can’t get that rate, 2.5% to 2.625% on a 7/1 ARM jumbo loan is still incredibly cheap.
When deciding to get preapproved, you might wonder whether to base it on a specific mortgage amount or the home’s price. Either way works because eventually, the bank decides how much they’ll approve. Most people start by setting a price range based on their income and down payment, like I did when I found a home priced at $2.9 million but offered $2.8 million to my lender.
It was a bit risky, betting the seller would agree to $100,000 less than their asking price. If not, I’d have to cough up a $1.2 million down payment instead of $1.1 million. But you’ve got to go with what works for you and be prepared to walk away from a property if necessary.
Now that I have the preapproval letter, I realize I should’ve applied for more credit, especially since it’s getting harder to secure credit these days. It’s easier to borrow less than what you’re preapproved for than to try to increase your credit later, which can take another 2-5 weeks.
The preapproval letter itself means you’ve applied for a mortgage, your credit has been checked and approved, you’ve submitted financial info like W-2s, pay stubs, and bank statements, an underwriter has reviewed everything, and you’ve received top-notch credit approval to shop for a home.
As a seller, unless you’re desperate, dealing only with preapproved buyers reduces the risk of delays or the deal falling through due to financing issues. I learned this the hard way when a buyer breached the financing deadline, causing a lot of stress.
During uncertain times, lenders tighten standards to protect themselves. For example, Wells Fargo and Chase now require buyers to have 20%+ down and a 700+ credit score. Many hopeful buyers might be disappointed when they can’t secure funding.
Remember, a preapproval isn’t a guarantee. It’s based on current terms and can change if regulations, your financial situation, or mortgage requirements change. It lasts about 30-45 days, during which you shouldn’t make any major financial changes like changing jobs or making big purchases.
Once you have your preapproval letter, include it when making an offer. It can make a difference since many buyers skip this step. If you want to adjust the estimated sales price in your letter after making an offer, it might not be possible without going through underwriting again.
Once your offer is accepted, you need an acceptable appraisal and title commitment, a final review with your lender, and new documents like proof of your earnest money down payment. As I said at the start, the real work starts once you get that preapproval letter. Take your time when buying — your credit is valuable, so use it wisely!
If you’re refinancing or buying a new property, consider platforms like Credible or CrowdStreet for competitive mortgage rates and real estate investment opportunities. With record-low rates, there are great opportunities out there, especially in lower-cost areas with higher rental yields.
