We talked about the benefits of a pre-approval letter and how it makes you a more qualified buyer when you present this letter to sellers when submitting an offer. But, a tailored pre-approval letter can actually help you win a bidding war. Here’s what I mean.
A pre-approval letter means that you have sat down with a lender or a mortgage broker or loan officer and determined how much you can afford in monthly housing costs. The lender will look over all of your income, debts, assets, and liabilities to determine a price range in which to keep your search within. But a pre-approved letter that’s tailored to that number is slightly different. Let me give an example so you understand what I’m talking about.
Tailored Pre-Approval Letters Can Help in a Bidding War
Let’s say that you want to buy a home4 $500,000. You may be approved up to $650,000. By tailoring the approval to the house you want to make an offer on, it shows sellers and the listing agent that you’ve already done the homework on how to buy this particular home. If there are multiple offers on this property or the buyers agent thinks that this will be a very hot home and it is just recently been listed, your buyers agent may submit an offer with an escalation clause stating that you are willing to pay up to a certain amount over the highest offer in certain increments. For instance, if the home is listed at $500,000 you may submit an offer seating that you’re willing to pay $5000 over the highest asking price up to $550,000. Attaching a letter of pre-approval stating that you are well approved up to $650,000 may show sellers that you’re willing to go above and beyond in order to get the home.
Of course, this is just one tactic in order to get your offer approved. The home still would need to be appraised for the inflated amount unless the buyer is willing to pay cash to make up the difference. But, in a lot of hot markets across Southern California, these inflated prices are very practical.
Side Note: When trying to buy a house LOWER than the asking price, a tailored letter can also be a benefit. Let’s say that the house is priced at $500,000 but it’s been on the market for over three months. If you are the buyer you may want to make an offer at $475,000. A tailored preapproval letter will state that you are approved up to $475,000 and no more. Even if you are, the sellers don’t know that and they may be willing to accept an offer if they feel that that is the highest that you can go. This is not being deceptive because you technically are approved for $475,000 but the seller and the listing agent don’t know if you can offer more so they may be willing to accept the offer.
Other ways to appeal to sellers in a bidding war would be to offer a higher earnest money deposit and/or a higher down payment. All cash offers will definitely increase your chances but it’s not the end-all. Terms still matter so as long as you don’t have a lot of hoops for sellers to jump through and a lot of additional contingencies, chances are a solid offer coupled with a qualified pre-approval letter that’s tailored to the seller, the home, and the buyers, is one of the best ways to get your offer accepted.