SANTA CRUZ (December 19, 2009) - When a seller accepts an offer to buy his (or her) home, he should be focused not on what price has been agreed to but whether or not the buyer is really ready, willing and able to buy his home. Unless the buyer is equipped to pay all cash for the property, the mortgage industry plays the crucial role of defining the word ‘able’.

When the seller and buyer reach an agreement regarding the price and terms of the sale (a fully executed purchase contract), the home is put into the ‘sale pending’ status, which effectively takes the home off the market and serves to inform prospective buyers that this home is already taken and is no longer available. The period of time between the point the contract is signed and the moment the escrow finally closes is called the escrow period, which typically lasts 30-60 days. During the escrow period the buyer has the opportunity to determine the condition of the property (through home inspections) and is expected to finalize his plans to obtain a mortgage.

The typical purchase contract allows the buyer 17 days (this time frame is always negotiable) to get a commitment for the mortgage and ascertain if the property is in an acceptable condition. It is relatively simple to back out of the purchase during this period but after this period passes, the buyer is expected to follow through and complete the transaction.

Needless to say, when the seller agrees to take his home off of the market he wants to be relatively certain that the buyer can obtain the financing necessary to pay the price that he agreed to in the purchase contract. With many sellers receiving multiple offers, a prudent seller will focus not just on the price that he is offered but he also will give considerable attention to the ability of the buyer to obtain the financing. Initially, that assurance comes in the way of a letter from a lender.

Alternatively, a prudent buyer will make sure that he can obtain a mortgage before making an offer to buy a home. Since at this point the home has not been identified, it is not possible to get a final loan approval but it is possible to get a loan preapproved, which is also referred to as a ‘credit approval’. That requires the lender to review the prospective buyer’s two years of tax returns, W-2s, 30 days of paystubs and 2 months of bank statements. Once this documentation and credit report have been reviewed by an underwriter, a loan preapproval is issued. Since mortgages are approved by an underwriter, an employee of the lender that has been given the authority to make the final loan approval decision, a preapproval that has not been given the blessing of an underwriter is not a loan preapproval at all but merely a prequalification letter. A prequalification letter is a statement from a loan officer saying that, based on the information and documentation received, it is his (or her) opinion that the loan will be approved.

A true preapproval would make reference to the fact that the file had been reviewed by an underwriter. Sellers and Realtors should insist on this. They need to be assured that the buyers that make an offer on their property have had their documentation reviewed by an underwriter and that they are able to move forward with their commitment to buy the home.

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.