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A Prequalification Letter Is Essentially Worthless in Today's Real Estate Market.

A loan prequalification, or "prequal," means nothing more than that you have had a discussion with a loan officer; you probably haven't even completed the 1003. A prequalification letter is a letter from your loan officer stating that you and she have had a conversation and you've told her what you do for a living, how much money you make, and what kind of bills you have outstanding.

Based upon this conversation, a loan officer will type up a prequal letter, essentially stating that based on what you've told her and using standard loan qualification guidelines, you are hereby "prequalified" to buy a house for a particular sales price and loan amount.

In the past, a potential home buyer would carry a prequalification letter around with him as he began shopping for a home. If a Realtor wanted to show homes to a home buyer, she would ask the buyer if he had been prequalified. The consumer would answer yes, and the Realtor would then show him homes.

When a consumer found a home that he wanted to buy, the seller or the seller's Realtor would ask to see his prequalification letter. This would tell the seller that the potential buyer had spoken with a loan officer.

Few Realtors accept prequalification letters anymore when you make an offer. They prefer a preapproval letter to a prequalification letter.

A preapproval letter takes the prequalification one step further. It isn't issued until the information provided to the loan officer has been verified and the credit report has been reviewed. Verification takes place using third-party sources. Income is verified by examining a recent paycheck stub, last year's W-2 form, or both.

Having enough money to cover both the down payment and associated closing costs is verified by examining recent bank and investment statements showing that the buyer has enough money to close a particular deal based upon an assumed sales price.

A preapproval letter is issued only after a review of the borrower's credit report. Most Realtors will accept a preapproval letter, but some want something even more solid: an approval letter with conditions.

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