Pre-approval letter

Key Takeaways

• A pre-approval letter follows a completed loan application, a credit pull, and documented income, debts, and funds, which is why it carries more weight than a pre-qualification.
• A pre-qualification is an estimate built on numbers the borrower states. A pre-approval is the lender's conditional commitment to a maximum amount.
• A pre-approval is still conditional. Appraisal, title, and any change in the borrower's credit, income, or debt can undo it before closing.
• In competitive Washington markets, listing brokers and sellers may require a pre-approval letter before granting showings or considering an offer.

What It Means

A pre-approval letter is a lender's written statement that it will lend a named buyer up to a stated amount, subject to conditions. It comes after real underwriting work. The buyer completes an application, the lender pulls credit, and the buyer documents income, monthly debts, and the funds available for the down payment and closing costs. That verification is what separates it from a pre-qualification, which is a fast estimate built on figures the buyer supplies without proof.

The letter does two jobs in a transaction. For the buyer, it sets a realistic ceiling before the search starts, so nobody falls in love with a house $80,000 above what a lender will fund. For the seller, it is evidence that the offer can close. A seller weighing two similar offers will normally take the one backed by a pre-approval over one backed by a pre-qualification or by nothing at all, and in a tight market a listing broker may not even open the door without one. Rate moves change what that ceiling buys, which our piece on interest rates and Washington home sales works through.

What a pre-approval is not is a guarantee. The lender still needs an acceptable appraisal and clean title, and the buyer's Credit Score, income, and Debt To Income Ratio have to hold steady through closing.

How It Works in Washington

Washington does not license real estate brokers to issue pre-approval letters and does not require a seller to accept one. What Washington regulates is what the broker does with the information inside it. RCW 18.86.050(1)(d) requires a buyer's agent not to disclose any Confidential Information from or about the buyer, except under subpoena or court order, and that duty survives the end of the agency relationship. RCW 18.86.010 defines confidential information as information the principal reasonably expects to be kept confidential, has not authorized to be disclosed, and that would operate to the principal's detriment if disclosed.

Put those together and the rule is clear. If your buyers are pre-approved to $340,000 but want to offer $305,000, the higher number is theirs to keep quiet. Telling the listing broker that they can go higher is a disclosure of confidential information, not clever salesmanship. Pointing the other way, RCW 18.86.030(1)(d) requires every broker to disclose existing material facts known to the broker and not apparent or readily ascertainable to a party, so a broker cannot forward a letter the broker knows has expired or been withdrawn. Our guide to loan qualification letters walks through what to check on the page itself.

Example

Alicia and Ben Ortiz apply with Sound Cascade Mortgage. The lender pulls credit, verifies $9,800 a month in gross income, counts $780 in existing monthly debt payments, and confirms $64,000 in savings. On March 3 it issues a pre-approval letter supporting a purchase price up to $430,000 with 10 percent down, good for 90 days and conditioned on appraisal, title, and no material change in the borrowers' finances.

On March 20 the Ortizes offer $412,000 on a Renton townhouse with $10,000 Earnest Money and attach the letter. Their broker, Kim Wallace, sends the pre-approval and nothing else. She does not mention that the couple is approved to $430,000, because that ceiling is confidential under RCW 18.86.050(1)(d). The offer is accepted. Two weeks later Ben finances a $46,000 truck at $860 a month, his monthly debt load more than doubles, and the lender re-runs the file and cuts the approved purchase price to about $395,000, below the contract price. The pre-approval did not survive the change, and the Ortizes have to bring more cash, restructure the loan, or use their financing contingency.

Common Mistakes and Exam Traps

• A pre-qualification is not a pre-approval. Pre-qualification rests on figures the buyer states, while pre-approval rests on a completed application, a credit report, and documented income and assets.
• A pre-approval is not an unconditional loan commitment. Appraisal, title, and continued creditworthiness are still open conditions.
• The maximum amount on a pre-approval letter is confidential information about the buyer, not a negotiating chip for the buyer's broker to volunteer.
• A pre-approval is issued by the lender, not by the real estate broker. The broker's job is to obtain it and pass it along, not to write it.