Selling a home in Portland, OR is not as easy today as it was just a few years ago. In particular, lenders are much more careful about how they approve and fund loans. Gone are the days when a borrower’s documentation could be as little as a four-page loan application and a pay stub. Today, lenders must collect and analyze enough documents to reveal almost every detail of a loan applicant’s financial life.
Because the loan process is more demanding than it has been in the past, there are many potential trouble spots for the marginally-qualified borrower. Good loan officers spend a great deal of time ensuring that the collection of documents making up a complete loan application represents an accurate snapshot of that borrower’s ability to make the payments.
Sellers (and the agents who represent them) know this. If they were to accept an offer from a prospective buyer who turns out not to be able to get a loan, they will have lost three weeks or more where their property was off the market, tied up with a buyer who ultimately cannot get a loan.
Most real estate purchase contracts today contain a “loan contingency.” This is a clause that states that the purchase agreement is subject to the buyer’s receiving a loan at the terms outlined in the offer. If they cannot get the loan for some reason, they can walk away from the deal and get the deposit they made with their offer returned to them.
Contingencies have a time for completion—typically 17 to 21 days, although different time frames are subject to negotiation between buyer and seller. With a 17-day loan contingency, the buyer has that time to get their financing fully approved. When they remove their contingency, they lose the ability to get their deposit back if something were to go wrong and they could not get the loan.
The loan contingency exists to protect the borrower’s deposit, but sellers are always reluctant to mark “Pending Sale” on their property’s listing without having some credible assurance that the buyer is actually qualified for the loan. This is where preapproval comes in.
A word about terminology. There is a difference between a borrower who is “prequalified” and one who is “preapproved.” The first category typically involves a credit report, a pay stub and perhaps a bank statement. The loan officer looks at the paperwork, decides that the applicant looks creditworthy and earns enough money to qualify, and writes a “prequal letter.”
The second category, preapproval, involves a process where the loan officer collects all the documentation that would be required if the borrower had selected a property and had received an acceptance of their offer. Every aspect of the loan application but the property address will be in the file. The loan officer will typically collect tax returns and W2s, pay stubs and bank statements. If there are large deposits appearing on the bank statements and they are not identified as payroll or transfers from another account, the loan officer will “paper trail” those funds to document their source. If there are gaps in the borrower’s employment history and credit issues, the loan officer will get letters of explanation for those matters.
Finally, the loan officer will submit the application to one of the Automated Underwriting Systems AUS), such as Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector. The AUS will analyze the information in the loan application and in the credit report and return its findings in a matter of seconds. If the AUS approves the loan, the loan officer will be in a position to write a preapproval letter for the seller.
There have been times in recent years when many sellers were able to choose between multiple competing offers on their home. This “hot” market was attributable to the comparative shortage of inventory—few properties on the market. Sellers would not even give the time of day to any offer without a credible preapproval letter accompanying it.
Now, as the market is a bit friendlier to buyers, a preapproval letter is still essential. Even though yours may be the only one the seller has in hand right now, you want to do everything you can to remove any doubt about your offer—and your ability to perform and close escrow.
With your loan preapproval, you will no longer have to guess about whether you can get a loan for the home you want in Portland. You’ll know.
When you get your preapproval letter, your file will already be nearly complete when you make your offer to the seller. You will have supplied most of the paperwork needed for loan approval, so you’ll just have to update some of the documents, such as pay stubs and bank statements, so they are current when the seller accepts your offer. Having your financing pre-arranged when you make your offer will give you the ability to close escrow in a shorter time. Closing quickly can be a real plus for both buyer and seller.
The most successful real estate transactions occur when buyer and seller are happy with the outcome. Buying and selling Portland real estate is a naturally stressful process, but spending some time at the outset to get a solid preapproval can only enhance the experience for everyone involved.