Preapproval or Contingent Approval, Which is Better?

When submitting an offer for a home you want to be in the best position for your offer to be accepted.  Sellers want a level of comfort that the offer being submitted is solid and won’t fall through as a result of the Buyer’s lack of financial soundness.

You used to be able to get a preapproval and slide into a contract with few questions asked. That is no longer the case. Although Lenders still allow you to have unverifiable income sources and get a mortgage preapproval, Sellers want more.  To get a preapproval, you simply tell the lender what you make, the lender pulls your credit, and based on your debt to income ratio they tell you how much house you can get and at what interest rate.  That’s just not good enough in a competitive Seller’s market.

Sellers want to see that a Buyer has moved as far along in the mortgage application and approval process as possible.  Obtaining a Contingent Preapproval gives a Buyer a level of comfort that a lender has obtained documentation supporting the Buyer’s income AND expenses.

I recently had a house go under contract where the builder gave push back on my Buyer’s preapproval.  They were very reluctant to sign because there was no Contingent Preapproval.  For a builder they would have TWO reasons to try and get a Contingent Approval.  One is they are really focused on getting you to sign a mortgage with their internal lender.  Large builders have, financing, insurance and other home buying services available to home Buyers.  If they can get a Buyer to sign with all their services, it drastically increases their bottom line. The second reason is, same as with an existing home Seller, they want assurance that they are going to close with the person they are under contract with.

This is where an experienced Seller’s agent would advise their client on the differences between a Preapproval and a Contingent Approval. For an existing home Seller that has multiple offers presented to them, it can be overwhelming in determining which Buyer’s offer to go with.  Don’t go it alone in making this decision.  Rely on the expertise of your REALTOR to answer your questions.

Back to that developer that didn’t want to take my clients preapproval, of course I pushed back until my client was under contract on her new home.  It’s not as if the developer didn’t already have a clause in the contract requiring a Contingent Approval x number of days after signing the contract.  They always draw up their own Offer to Purchase and Sales Contract, that’s always worded to their favor. Hmmm, that sounds like another for us to discuss later.  Because my client was not using the builders finance company, it then became about keeping their costs down in case my client isn’t able to close.

If you’re the Buyer, just understand that it makes good business sense to get a Contingent Approval when the market is very competitive.  A Seller wants to know that they are actually going to close with the person they sign with and in a timely manner. It puts you ahead of other Buyers when making an offer on a home, and it doesn’t hurt to make that fact known by submitting a personal cover letter to the Seller and reminding them of the benefits of a Contingent Preapproval.  So, for those that haven’t got it yet, yes, it’s better to have the Contingent Preapproval instead of an unsubstantiated Preapproval.

I would love to hear back from Buyers that used this strategy and felt it worked in their favor.  Just ask the Seller, they’ll let you know what made your offer the most attractive.  Happy House Hunting!!

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