Is Your Pre-Approval too High?

If you know what a pre-approval is and you know what I’m referring to in the title, then the quick answer is:

No. Never. For a seller to assume that you’ll pay more simply because you can afford more, is very stupid. If you need more than this, read on. 🙂

When you start thinking of buying a home, you should get what’s called a pre-approval from a lender to prove to your agent, yourself, and any sellers that you can in-fact buy a home. When you put in an offer, the seller will also require you to include your pre-approval.

I never really cared either way… until it backfired one time.

I’m not sure where or when this started but at some point in time, there was this practice and/or belief that you needed to include a pre-approval that specifically matched your offer price. For example, if you’re approved up to $500,000 but you’re buying a property for $425,000, you should request another pre-approval from your lender that states “$425,000” instead of your max. I’m guessing this was used as a tactic—and that’s all it is—to convince the sellers that this is all you have and that you can’t go any higher on price. This is fairly common practice, and I had several buyers who were actually concerned about the pre-approval being too high. I never really cared either way… until it backfired one time.

I was representing buyers and they put in an offer on a high-end property. We made an offer on the property about 20% lower than list price. Our pre-approval – OF COURSE! – matched our lowball offer. The sellers were overpriced, so we were probably only about 10% lower than a fair price, and our plan was to meet in the middle and send a little message at the same time. We were also given false info regarding how motivated the sellers were from the list agent—I digress. The sellers rejected our offer for a bunch of reasons. One of the reasons was that they were concerned that our pre-approval didn’t allow us any room to negotiate.

It got me thinking. What if our pre-approval showed our true buying power? Does that force us to pay more? The only reason that you wouldn’t want to show a higher pre-approval is to convince the seller that you’re buying at the top of your range. However at your detriment, they may be concerned that you can’t afford to negotiate, or that you may not be able to afford the home because you appear to be pushing your budget to the limit.

Show that ‘I can buy more house if I want to’ card

Ever since that situation I have always recommended that we use a pre-approval that is well above our purchase price offer. We don’t have to hide our buying power. Just because you can buy up to a certain limit doesn’t mean that you have to pay that much. I would argue that your pre-approval can never be too high, because it will only let the sellers know how “good” you are as buyers are concerned. Being able to afford much more than what you’re offering gives the impression that your finances are in order and that there won’t be any issues getting a mortgage for the property.

How often do you pay an amount for something negotiable because it’s all you have? Never. You always can buy more, but the reason you won’t go higher is based on other factors. Without getting into specifics of negotiation, use reason, facts, market history, and your own courage to negotiate and don’t fall back on an empty tactic like adjusting your pre-approval number for confidence or a reason to not go any higher. Show that “I can buy more house if I want to” card and give the sellers confidence that if they can come to an agreement with the price and terms you’ve offered, they won’t regret it. Stand your ground at what you believe is a fair price and/or what you are comfortable affording, but do it with other ammo… not the “this is all I got sir, I swear” type ammo.

This is just another way you can be smart about your real estate. 😉

Thanks for reading! Comments welcome!




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