Should Your Pre-Approval Amount Match Your Offer Price?

Should your pre-approval amount match your offer price? What are the risks and benefits of using a pre-approval letter for an amount which is higher than your offer price? This is a contentious topic for buyers, sellers and brokers which evokes strong opinions.

The main benefit of presenting a pre-approval letter which exceeds your offer price is that it may give a seller additional confidence in your financial qualifications.

If a seller is more confident in your ability to ultimately receive the loan approval and close on the purchase, she or he might show more flexibility when negotiating than they otherwise would have. A seller may also prioritize you over similarly priced offers if your higher pre-approval amount leads them to conclude you have stronger financials.

Seeing a large buffer between the offer price and the pre-approval amount is particularly valuable for a seller in a scenario where there’s a risk of a low appraisal. In the case of a low appraisal, the purchaser may need to raise the down payment to cover any funding cap, and this requires greater financial resilience. In the eyes of a seller, seeing a comfortable buffer between the contract price and the pre-approval amount may suggest that the purchaser has the requisite financial liquidity to withstand a low appraisal.

Therefore, the seller might be more inclined to select the offer with the higher pre-approval amount instead of another offer with similar terms.

Showing a seller that you’re overqualified for your loan is also beneficial in an uncertain/falling market environment where lenders are tightening loan-to-value and underwriting standards, thereby raising the risk of loan denials.

During the second half of the COVID pandemic in NYC, many lenders raised their minimum down payment requirements for Manhattan apartments. In a market with an elevated risk of loan denials, a seller will pay closer attention to a buyer’s financial qualifications when determining how to counter and which offer to ultimately accept.

Having a pre-approval letter which is higher than your offer price also means that you won’t run the risk of delaying the negotiation process by having to wait for an updated pre-approval letter from your lender each time you raise your offer price. In a multiple, competitive offer situation, delays in obtaining an updated pre-approval letter might result in you losing the deal altogether. After all, a seller will not wait around for you to furnish an updated pre-approval letter if they have a plethora of similar offers to choose from.

If you’re waiting on a pre-approval letter, you can certainly submit a higher offer and indicate that an updated pre-approval letter is forthcoming. However, a seller still might not feel comfortable accepting your offer until they see a pre-approval letter which meets or exceeds the revised offer price.

The possible delay in your offer being accepted also leaves you more vulnerable to possible new offers entering the picture.

In any case, raising your offer without simultaneously presenting an updated pre-approval letter makes your counteroffer feel less credible compared to other fully documented offers which a seller might be considering.

The primary drawback of submitting a pre-approval letter which exceeds your offer price is that it may lead a seller and listing agent to assume that you’re both willing and able to pay more. This might encourage a seller to show less flexibility during a negotiation.

While most experienced listing agents in NYC understand the clear distinction between a purchaser’s willingness and ability to pay, an inexperienced listing agent may conflate the two and influence the seller’s negotiation strategy as a result. Your buyer’s broker can help in getting a ‘read’ on the pedigree and thought process of the listing agent you’ll be dealing with.

If your lender has an automated or extremely fast procedure for generating updated pre-approval letters, we suggest having the pre-approval amount match your offer price exactly for both the initial offer and subsequent improvements.

If, on the other hand, it’s a multi-day process for your lender to update a pre-approval letter, we suggest requesting a pre-approval for an amount which is at the top of your budget and using this same pre-approval during the entire negotiation process.

If you’re interested in a hot listing which may attract a bidding war or a best and final scenario, we suggest using a pre-approval letter for an amount which is comfortably above the highest offer price you foresee submitting. As we previously mentioned, there’s simply not time in a fast-paced bidding war situation for you to repeatedly request updated pre-approval letters from your lender.