To Pre-Approve or Pre-Qualify or Proof of Funds; That Is The Question…

Here in sunny Southwest Florida, when a buyer gets ready to put an offer on a property, the seller (typically mentioned within the “confidential comments” of the MLS listing) requires it to accompany a pre-approval letter or proof of funds. If the buyer is a first-time buyer or doesn’t have this practice where they are relocating from, it can not only prove confusing, but slow down the bidding process; and possibly result in losing out on purchasing that property. That’s why a good real estate agent will discuss this with you first, not to be nosy, but to help you be as prepared as possible should you decide to place an offer on a property.

Once you understand the difference between Pre-Approval from Pre-Qualification from Proof of Funds, the concepts are straightforward. This article hopes to quickly clear up any confusions between the three concepts…

Pre-Qualification – A lender has evaluated your creditworthiness and determined that you probably will be eligible for a loan up to a certain amount. This is typically quickly analyzed and sent to the buyer via email for the purposes of looking at property and/or making a verbal offer. In some instances, a real estate agent may not work with buyers until they know what they qualify for when looking at properties within a certain price range.

Proof of Funds – A person or entity that has cash on hand to close is a cash buyer and will NOT be taking out a mortgage on the property. The cash needs to be liquid and readily available. In order for a cash buyer to prove they have the funds, they typically provide verification of funds via a document showing the:

  • date,
  • name of account holder, and
  • the balance of funds on deposit.

For the purposes of placing an offer, verification of funds is typically in the form of an official letterhead from the institution holding the cash, again, showing the date, name of account holder, and the funds available on deposit. This letter is turned in with the initial offer by the person’s real estate agent to verify to the seller that they have the funds needed to purchase the property.

Pre-Approval – This is the real deal, a statement from a lender that you qualify for a specific mortgage amount based on an underwriter’s review over all of a buyer’s financial information: credit report, pay stubs, salary, bank statement, assets, and obligations. The pre-approval letter is what the seller typical requires in accompanying an offer on a property. This “official” letter holds greater weight and proof, than a mere pre-qualification, that you can purchase a given property.

The biggest step towards success is knowing which one you need BEFORE you start looking for a property to purchase. Once you decide which you will need, be prepared with the proper paperwork to show when submitting an offer; this will help you look like a serious buyer and put you closer to hopefully closing the deal on the property of your choice.

Happy hunting!


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