Say you decided to sell your building and I offered to buy it. Say I offered you the following deal: I’ll buy your building for $1MM, but first I want you to guarantee you won’t sell it to anyone else for the next 45 days while I get the money together.
You would be an idiot not to check if I had the ability to get the money before allowing me to tie up your property for 45 days, right?
Most sellers aren’t idiots. They want to know that the person who is offering to buy their property at a certain price has the wherewithal to do the deal. And that’s where the pre-approval letter comes in.
A pre-approval letter is a letter from a bank or loan broker attesting to the fact that you, the buyer, are capable of getting the loan necessary for you to close. Either implicitly or explicitly, the letter assures the seller that someone knowledgable about getting loans has looked at your credit score, your tax returns, your employment history, etc. and has determined that you will be able to get the loan you need. It’s not binding (neither you nor the seller can sue the bank if they don’t end up doing the loan), but it does provide some comfort.
Incidentally, the pre-approval process is great for buy-side brokers (like me), because it filters out serious buyers from bs artists. The process of getting pre-approved isn’t terrible, but it does require that you open your kimono for a lender or loan broker. Your willingness / ability to do so is my first indication that you are worth spending my time on.
So, when you call me about buying your first property, and I immediately refer you to a loan broker, don’t be surprised. It’s the best way for everyone to gauge just how serious you are about making a deal.