A mortgage commitment letter is a formal document from your lender stating that you’re approved for the loan. Lenders issue a mortgage commitment letter after an applicant successfully completes the preapproval process. The letter tells the applicant how large of a mortgage the lender will likely approve, and the applicant can use the letter to show real estate agents and home sellers that they’re creditworthy and a serious home buyer.
In fact, most sellers won’t consider an offer (other than cash) from a buyer who is not preapproved. That’s why it’s essential you submit a loan application and partially complete the underwriting process to receive a final commitment letter early in the process, so you’ll be well prepared once you find your dream home.
Types Of Mortgage Loan Commitment Letters
There are two types of commitments: conditional and final.
A conditional commitment letter approves the borrower for a certain loan amount, as long as certain conditions are met. This type of commitment letter may contain the following pieces of information:
Lender’s name
Borrower’s name
Statement of preapproval
Type of loan
Loan amount
List of conditions that must be met before final approval
Amount of days preapproval is valid
A final mortgage commitment is when the conditions have been met and the lender promises to lend you the specified amount. This letter typically contains the following information:
Lender’s name
Borrower’s name
Property address if an offer has already been made
Statement of approval for loan
Type of loan
Loan amount
Loan term
Interest rate
Date of commitment
Rate lock expiration date
Commitment expiration date
How And When Do I Get A Mortgage Commitment Letter
To get a mortgage commitment letter, you’ll need to go through the application process to get prequalified and then initially approved. This process may require you to provide documentation, like bank statements and pay stubs, to show you have a steady income and enough money to uphold the financial responsibilities of the loan.
The lender will also review your credit score and credit history to get a better idea of your financial situation, plus the amount of debt you have and how you handle it. This information helps the lender determine how much more debt you’re able to take on.
Does A Loan Commitment Letter Mean I'm Approved?
After you’re preapproved, you’ll receive a conditional mortgage commitment letter. That does not mean you’re approved for the loan. With this conditional approval, you’ll still have steps to take in the mortgage application process.
Lender Conditions Vary
A conditional approval means that certain conditions must be met before the lender can approve your mortgage. Conditions will vary by lender and state law, but a few common conditions you can expect include:
Purchase agreement
Submittal of all necessary documents
Satisfactory home appraisal
Proof of homeowners insurance
Ability to pay closing costs and down payment
Proof of title
Final underwriting approval
Another important condition is that your financial status and credit report remain essentially the same, with no major changes, until the home loan closes.
Lenders Will Require An Appraisal Of Your Home
Your credit and income are only half of the equation. A satisfactory home appraisal is another major part of getting final approval for your loan. Your lender will not lend more than the appraised value of the home. This can help you avoid paying more for your home than it's worth and the possibility of a mortgage default.
How Much Of A Commitment Does The Letter Represent?
As long as nothing changes financially with the applicant during the house hunting phase and the home’s appraisal value covers the loan amount, the loan commitment generally stands. However, the lender reserves the right to reduce the loan amount or deny the application.
Why Is Having A Mortgage Commitment Letter Upfront Important?
Having the letter indicates to real estate agents and home sellers that you’re a serious buyer. It also shows that you can afford the home and have already started the mortgage process. It can further assure the seller that there could be fewer hiccups down the road. Because of these reasons, this letter can be especially helpful in a seller’s market, when competition among buyers is particularly high.
What Happens After Recieving Your Mortgage Commitment Letter?
Once your mortgage commitment letter has been submitted, you’ve entered the final stage of the mortgage process. The letter is not a final approval, but more so a pledge to the borrower that the mortgage lender will grant the loan if all conditions are met. If there are no loose ends, you should be approved.
Once you’re approved and getting ready to set a move-in date, you’ll need to go through the settlement process of the purchase transaction and mortgage loan. It’s important to note that just because your mortgage company created the commitment letter, doesn’t mean you shouldn’t be able to still back out. Nothing is final for the borrower until the loan is funded and all the closing documents are signed.
Conclusion
A mortgage commitment letter can help you set a home buying budget and gives you a leg up on the competition when putting in an offer on a home by showing you’re a serious buyer. To make sure you’re fully prepared to submit an offer or win a bidding war, you should consider starting the initial approval process.