The Veridian Blog

Preapproval letters come in all shapes and sizes. Do either seller or buyer have recourse if the lender does not meet the terms of the letter?

Unfortunately, not. The Preapproval Letter is an un-standardized non-binding document with a sole purpose to give the seller (and seller’s agent) assurance that the buyer won’t have any problems obtaining financing. In the past, potential buyers would need to be first pre-qualified – another vague term for a broker to qualify a buyer over the phone or in person. The Pre-Approval letter then represents a higher level of examination and verification into the buyers background. We often ask for initial documentation such as a paystub, bank statement showing source of down payment, and a copy of their credit report to before issuing a Pre Approval Letter. This practice will vary, however, from lender to lender.

As you probably know, the Preapproval Letter is no guarantee that the loan will be funded and when that happens, there is no legal recourse (no case precedent) against the broker as the letter is not a binding offer to lend credit. Ultimately, every loan application will be viewed with an underwriter’s human eyes and will almost always be approved conditionally. There are simply too many potential pitfalls to navigate before funding occurs – during loan submission, before docs, during signing, before funding – for any lender to be held accountable for what they “pre-approve” at the early stages of the loan process. As such, the Preapproval Letter should be taken with a grain of salt – similar to the Good Faith Estimate. It is a somewhat reliable, yet not conclusive, indication of borrowing power.