Most buyers can easily understand why they should include a mortgage pre-approval letter with any home offers they make. It tells the seller that you’ve done your homework and are ready to put your money where your mouth is. But a more difficult consideration is whether your pre-approval limit should match or overshoot the offer you make?
This is a highly contentious question among both buyer’s agents and investors. Some insist that the pre-approval amount should be well above the offer price. The argument being that this demonstrates the buyer’s strong financials and ability to close without issue. But others argue that this only leads to tougher negotiations with the seller. This is because they now know you can afford to pay more. So, what’s the best solution here?
Here we lay out our thoughts on this debate and offer what we believe is the best approach to this question. As you’ll soon see, there is no one-size-fits-all response to this predicament. It all depends on the unique situation you find yourself in and the type of seller you’re dealing with.
Why it’s (usually) Better for Your Pre-approval Limit to Exceed Your Offer Price.Why it’s (usually) Better for Your Pre-approval Limit to Exceed Your Offer Price.
In most home transactions, the better approach is to have your pre-approval limit exceed your offer price. The reasons are many and seem obvious upon examination. For a start, it gives the seller greater confidence in your financial qualifications. There’s nothing inherently wrong with submitting an offer at the max of your allowable borrowing limit. But it does raise questions about your ability to handle any bumps on the road to closing day. For this reason, most sellers and listing agents prefer to see a buyer that’s overqualified for their loan.
This is especially so if the seller is worried about getting a low home appraisal. If that happens, then the buyer has to raise their down payment to cover the difference. Doing so requires stronger financial resilience, which a high pre-approval amount tells them you have.
Uncertain markets where lenders are tightening borrowing standards are another reason for sellers to favor overqualified buyers. A situation that the NYC market currently finds itself in due to the COVID-19 pandemic.
A large buffer between the pre-approval limit and offer price also means less time wasted during negotiations. When the buyer raises their offer, there’s no waiting period for the lender to furnish a new pre-approval letter. Some lenders can be pretty quick with this and have an updated pre-approval letter within a few hours. But others can take a day or more. In a multiple offer situation where the seller is eager for a fast closing, this waiting period could prove fatal. Any delay in submitting an updated pre-approval letter also risks giving other buyers a chance to submit their offer.
Why it’s (sometimes) Better for Your Pre-approval Limit to Match Your Offer PriceWhy it’s (sometimes) Better for Your Pre-approval Limit to Match Your Offer Price
Now, as said, having a large gap between your pre-approval limit and offer price will be the best course of action. Most of the time, at least. The majority of NYC sellers and listing agents are wise enough to know there’s a big difference between what a buyer can spend and what they’re willing to spend. Some would even say that the amount a buyer qualifies for should be of no concern at all. What matters is what the property is worth and how much the buyer is willing to pay.
But, as with anything, there are exceptions. Some sellers do allow the amount a buyer qualifies for to influence their decision-making. They see that you could pay more and start asking you to raise your price. They may even be right to do so if the buyer’s offer is below the asking price. Emotions start to enter the picture, and negotiations go nowhere. An inexperienced listing agent who doesn’t understand the distinction between a buyer’s willingness and ability to pay can also worsen.
Your best course of action here is to listen to your buyer’s agent. An experienced agent can give you a good reading on the seller’s motivations and the listing agent’s thought process. If they believe your prequalification amount may influence negotiations, then it may be wiser to match it to your offer. Of course, factors like the state of the market and whether there are competing offers will also influence this decision. Also, if you’ve got a loan officer with a swift procedure for generating updated pre-approval letters, then you won’t have to worry about wasting time.
You also have a few options here on how you present your offer. For instance, you can include an escalation clause stating that you are willing to pay up to a certain amount over the highest offer in certain increments. This works well when you know there are other competing offers in the pipeline. It also shows the seller that you can be flexible on your offer and aren’t maxing yourself out.
Final ThoughtsFinal Thoughts
Knowing whether your pre-approval letter should match or overshoot your offer is an important factor in any deal. But it’s not the only thing. As you move through negotiations, the important thing will be to understand the seller’s motivations. What will it take to sweeten the deal and get them to choose you over your competitors? It might be a higher down payment or deposit, a change in terms of the contract, or just the right price at the right time.
Your buyer’s agent will be there to brief you on all of this and keep you updated. If they believe matching your pre-approval letter to your offer is the right way to go, then do it. But if, instead, they believe the better approach is to look super qualified for your offer, then that’s the road to take. Either way, the key thing is to make sure you get the home you want at a fair price.