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Sadly, some real estate transactions fall out of escrow because the buyer proves unable to qualify for a large enough mortgage on acceptable terms. That's why REALTORSŪ and sellers naturally take a very keen interest in the buyer's financial profile.

A buyer's ability to finance the transaction is particularly important in a hot market because many sellers are receiving multiple offers for their home. All else being roughly equal, an offer stands a better chance of prevailing if the buyer has a good credit history, extends a sizable earnest money deposit, is willing to make a high-percentage down payment and shows other signs of financial ability to close the transaction.

One of the best ways to demonstrate the buyer's financial strength is to attach a prequalification or preapproval letter from a reputable lender to the offer. These letters, which estimate how much money the buyer will be able to borrow, are widely available and not difficult for qualified buyers to obtain. "The difference between someone having a letter or not may make the difference between getting the house or not," notes Teri Turquand, manager of Countrywide Home Loans in Torrance, Calif.

Generally, the preapproval letter is more reliable than the prequalification letter because the preapproval involves more investigation by the lender. In writing a prequalification letter, the lender usually relies on a credit report and verbal income data from the borrower to calculate a rough maximum loan amount. In writing a preapproval letter, the lender examines such financial documents as the borrower's recent paycheck stubs, W-2 forms, bank statements and possibly income tax returns.

Neither type of letter is an absolute loan commitment. On the contrary, both types contain "subject to" items that must be completed before the loan will receive final approval. Typically, the prequalification letter has a long list of "subject to" items, whereas the preapproval letter requires only an appraisal of the property. Turquand says every letter she writes mentions the documents she's reviewed and specifies the "subject to" items.

Buyers should be aware of one potential pitfall with these letters. If the letter states a maximum loan amount higher than the price the buyer is offering for a home, a sharp seller may return a counteroffer that reflects the highest amount for which the buyer has been preapproved. In effect, the letter weakens the buyer's bargaining power.

To avoid this trap, buyers can use a maximum amount letter to shop with a REALTORŪ for a home in a price range they can afford, then request a preapproval letter with a specific loan amount when they are ready to make an offer.

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