By Sonja Gosine, Spokesperson at Hauseit® / November 10, 2020
Should your pre-approval amount match your offer price? What are the risks and benefits of using a pre-approval letter for an amount which is higher than your offer price? This is a contentious topic for buyers, sellers and brokers which evokes strong opinions.
The main benefit of presenting a pre-approval letter which exceeds your offer price is that it may give a seller additional confidence in your financial qualifications.
If a seller is more confident in your ability to ultimately receive the loan approval and close on the purchase, she or he might show more flexibility when negotiating than they otherwise would have. A seller may also prioritize you over similarly priced offers if your higher pre-approval amount leads them to conclude you have stronger financials.
Pro Tip: Estimate your home buyer closing costs in NYC with Hauseit’s Interactive Closing Cost Calculator for Buyers.
Seeing a large buffer between the offer price and the pre-approval amount is particularly valuable for a seller in a scenario where there’s a risk of a low appraisal. In the case of a low appraisal, the purchaser may need to raise the down payment to cover any funding cap, and this requires greater financial resilience. In the eyes of a seller, seeing a comfortable buffer between the contract price and the pre-approval amount may suggest that the purchaser has the requisite financial liquidity to withstand a low appraisal.
Therefore, the seller might be more inclined to select the offer with the higher pre-approval amount instead of another offer with similar terms.
Showing a seller that you’re overqualified for your loan is also beneficial in an uncertain/falling market environment where lenders are tightening loan-to-value and underwriting standards, thereby raising the risk of loan denials.
During the second half of the COVID pandemic in NYC, many lenders raised their minimum down payment requirements for Manhattan apartments. In a market with an elevated risk of loan denials, a seller will pay closer attention to a buyer’s financial qualifications when determining how to counter and which offer to ultimately accept.
Pro Tip: Estimate your seller closing costs in NYC with Hauseit’s Interactive Closing Cost Calculator for Sellers.
Having a pre-approval letter which is higher than your offer price also means that you won’t run the risk of delaying the negotiation process by having to wait for an updated pre-approval letter from your lender each time you raise your offer price. In a multiple, competitive offer situation, delays in obtaining an updated pre-approval letter might result in you losing the deal altogether. After all, a seller will not wait around for you to furnish an updated pre-approval letter if they have a plethora of similar offers to choose from.
If you’re waiting on a pre-approval letter, you can certainly submit a higher offer and indicate that an updated pre-approval letter is forthcoming. However, a seller still might not feel comfortable accepting your offer until they see a pre-approval letter which meets or exceeds the revised offer price.
The possible delay in your offer being accepted also leaves you more vulnerable to possible new offers entering the picture.
