Credit Ratings, Pre-Approvals and Offer Letters: Three Pieces of Your Home buying Puzzle

In your new homebuying journey, when you have found “the one,” there’s a three-piece puzzle to put together. The pieces are: a solid credit rating, preapproval for a mortgage loan, and an offer letter to officially bid on the home.

Credit Report

When considering you for a home mortgage loan, financial institutions will run a credit report as one of the first steps in the process. You can request your own free credit report through several online services to see what the lender is seeing, too, and to check for any errors that may affect the mortgage rate that is offered to you.

The lender will review your credit report and evaluate the information available. They will look at the overall score (the range is between 300-850; generally over 700 is considered good), your payment history on credit cards and other loans, how much credit you use at any given time, and other issues like whether you have bankruptcies, disputes on the report, and other details.

Preapproval Letter

The next step is for the mortgage lender to provide you with a preapproval letter, which is often required to be able to make an offer on a home. Your realtor might even ask you to have this letter before they take you on home tours. The lender will consider your current income, credit score, investments, current debt, and other financial details to create the letter.

The preapproval letter says that the lender is tentatively willing to provide a loan to you, and it usually specifies a maximum amount and expiration date (typically 90 days). If you don’t make an offer within that time frame, you may need to request another preapproval letter. If your offer is accepted, you will still need to go through the mortgage application process, as the preapproval is not a guarantee of a loan. The Summit Federal Credit Union has Mortgage Team representatives in your community who can help you through the preapproval process as you begin to search for your new home.

Offer Letter

The final piece of the puzzle is to submit an offer letter. Using the financial information from your preapproval letter, you will work with your real estate agent (and sometimes your mortgage representative or other members of your homebuying team) to come up with a realistic and competitive offer to submit to the seller. Your offer letter will include the price you are willing to pay for the home and any terms, contingencies and requests you may have to complete the deal.

Recently, some offer letters are also including an escalation clause that increases your offer incrementally, up to your “best and final” number, if there are competing offers on the home. This allows you to provide an initial offer number and to state the maximum you are willing to pay, which helps you to avoid a back-and-forth bidding war. 

We are here to help! Contact a local member of The Summit Mortgage Team near you to begin putting together this homebuying puzzle.