When you’re selling your house For Sale By Owner, you won’t have the benefit of a real estate agent helping you assess the offers that are sure to come rolling in. It’s human nature to focus on the bottom line, that big number that shows what the buyer is willing to pay for the house. And if it’s dazzling enough, it might be easy to overlook other elements of the offer–from contingencies to timing.
But there’s one important offer element that FSBO sellers often misunderstand – only because the two words appear to be so similar – and that’s the difference between having a mortgage “prequalification” or a “preapproval.”
However, this seemingly small detail can have an outsize effect on whether your sale closes or not. Let’s dig into what these two words mean.
When a buyer goes to a mortgage lender to see if they can borrow money for a house, the first step is called a “prequalification.” That means that the mortgage lender takes some time to look into the financial information the buyer has supplied and offers a ballpark estimate of the ultimate mortgage loan.
In other words, it’s less of a commitment from the mortgage lender, because they are taking the buyer’s financial disclosures of such elements as income, assets, monthly debts, etc., at face value, without really looking into them with the due diligence that an eventual mortgage will require. The lender will then offer the buyer an estimate of how much monthly mortgage they can afford. This is known as a prequalification and is mostly used to help focus the home search process.
But it’s important to note that a prequalification is a rather cursory process – it’s usually done for free and in less than a day, and might even take place over the phone. As you can guess, that means that it’s not as in-depth or binding as you would want as the FSBO seller, who is depending on this loan to close in order for the sale to be complete. The prequalification is only as accurate as the information the buyer provided the mortgage lender, which means that there still might be some disappointments lurking in the wings as the buyer’s finances are eventually scrutinized in more detail.
The key word here is “approval.” In the preapproval process, a mortgage lender has gone a step beyond considering the information the buyer has supplied and has actually done all the due diligence into a buyer’s finances. They have verified income, assets and other documentation, and checked the buyer’s credit score.
Based on what they have learned, the mortgage broker is essentially “approving” a specific amount of money for the buyer’s mortgage (barring some huge, unexpected change, we should add). A preapproval is typically good for 90 days.
With both the prequalification and preapproval, the buyer’s lender will issue a letter that states how much money they expect to loan, using the information at hand. But as you can see, the prequalification is a lot weaker, as the lender is only basing it on what the buyer has disclosed. Often a buyer doesn’t realize certain financial realities that might impact their mortgage amount and thus may have inadvertently forgotten to disclose them. Or they assume their credit is strong, when in reality their score has been dinged based on a past issue.
So while neither the prequalification or the preapproval is a guaranteethat your buyer can close the deal with the hoped-for funds, the weight of a preapproval means the buyer is far more likely to receive the amount that has been specified. That’s because the lender is unlikely to uncover any unexpected “surprises” since they have already completed the bulk of the verification.
And here’s why that’s crucial to you, the FSBO seller, as you evaluate offers. Most home buyers can’t complete the sale unless they receive all the money they are expecting from their lender. And if a deep dive into their finances turns up something troubling, your “sure thing” buyer might turn into a “no-show.” And that’s the last thing an FSBO seller wants to hear as they eagerly await their closing.
So, as you assess the offers coming your way, make sure to pay extra attention to that seemingly modest difference in the two ways your buyer may present their potential mortgage. You’ll want to favor a “preapproval,” over a “prequalification” because you can be that much more confident that the financing will be lined up without a hiccup.
Need more tips on selling your home for top dollar? Check out our Ultimate Guide on How to Sell a House For Sale By Owner.
