If you’re looking to buy a home, it’s only natural to be a little confused by the process. After all, there’s a lot of paperwork to consider and plenty of steps before you’ll be able to secure your new home. Getting a mortgage commitment letter is one of the best ways to ensure you’ll get the home you’re looking for.
Of course, like many of the steps you’ll take to buy a home, getting a mortgage commitment letter probably wasn’t covered in school. That’s why we’re here to go over everything you need to know.
A mortgage commitment letter is a letter from a financial institution that states that the holder and the bank have an agreement for the terms of a loan.
Mortgage commitment letters are also sometimes called mortgage approval letters for that reason. With a commitment letter in hand, buyers know exactly what kind of loan they are eligible for, and sellers know that the buyer won’t have any trouble securing the mortgage after agreeing to buy their home.
Having a mortgage commitment letter in hand is one of the best ways to ensure nothing will go wrong during underwriting. It’s also a great way to make your offer look more enticing to sellers.
After all, the more secure your offer is, the more certain home sellers will be that your offer will go through.
There are two types of mortgage commitment letters you need to know about. Both types serve the same purpose, but some important differences can affect the buying process.
Here’s what you need to know about both types of mortgage commitment letters:
Conditional Mortgage Commitment Letters
Conditional mortgage commitment letters are significantly more common than final ones. They mean that the buyer will be approved for the loan, but a few conditions must be met first.
Usually, those conditions include:
- The home must pass inspection.
- The lender requires proof of homeowners insurance.
- The buyer must be able to provide proof of down payment in advance.
- The buyer’s credit score and income cannot change between when the letter is issued and when they receive the mortgage.
- Final Mortgage Commitment Letters
Final Mortgage Commitment Letters
A final mortgage commitment letter is usually provided only after the buyer has met all the conditions in their conditional letter. However, in some rare cases, financial institutions may choose to issue a final mortgage commitment letter without starting with a conditional mortgage commitment letter.
The final commitment letter also includes the details of the mortgage itself. That includes the loan term, interest rate, and the type of loan.
Getting a mortgage commitment letter isn’t a difficult process, but there are several steps involved that need to be followed.
Mistakes at any point in the process can make it take longer to get your mortgage commitment letter, so it’s important to follow instructions and make sure you’re working closely with your bank to see that everything is taken care of.
1. Mortgage Prequalification
The prequalification is the first thing you’ll need to take care of if you’re looking to get a mortgage commitment letter.
Prequalification can even be done before you have a house in mind, which is useful because it can help you finalize your budget and know what kind of homes you should be looking for.
All you need to do is give your prospective lender some information about your finances and request a prequalification. The financial institution will also conduct a credit check to learn more about your financial history.
Sometimes this will be a hard check, which can affect your credit score moving forward. However, other financial institutions will only make a soft check and save the hard check until a little further on in the process.
The pre-approval process is similar to the prequalification process. However, this is a more in-depth check to make sure everything still looks good and to help determine the final amount the financial institution is willing to offer for your mortgage.
The process is relatively simple. All you’ll need to do is fill out a mortgage application form and provide the bank with some additional paperwork. Usually, you’ll need to provide proof of income, bank statements, and proof of ownership for any significant assets you already own.
Once you’ve turned in all the paperwork, the bank will submit a hard check on your credit, if they haven’t already, to make sure you’re in good standing before finalizing the amount.
3. Mortgage Commitment Letter Issued
Once all of the details of your pre-approval are finalized, the bank or financial institution will issue your mortgage commitment letter. Most of the time, this will be your conditional mortgage commitment letter, which means that there are still a few more steps you’ll need to take before finalizing your approval.
To get your final approval letter, you’ll need to submit more paperwork, including details about the home you’re considering and proof that you can afford the down payment and closing costs associated with buying your new home.
Many prospective homebuyers are uncertain of the timing of certain steps in the process. After all, in today’s buy housing markets, it’s common for many things to happen very quickly or for missed steps to cost buyers a home.
Getting your mortgage commitment letter should happen in two phases. You can get your conditional mortgage commitment letter before you have a house in mind.
The conditional document simply certifies that you meet the financial criteria for a loan.
To get your final commitment letter, you’ll need to have a house in mind and be in the process of making the purchase. That’s important because you’ll need an estimate of the home’s value, an approved inspection, homeowners’ insurance, and other details in place before the commitment letter can be finalized.
The most common form of a mortgage commitment letter, a conditional letter, isn’t quite the same as an approval.
That’s because there are still some steps the bank will need to take to finalize the details of your loan, and they can’t take those steps until you’ve found a home and gone through some of the final paperwork before purchase.
A commitment letter guarantees that you’re eligible for a loan, but your home and the rest of your finances need to be in good shape before you get your final approval.
Mortgage commitment letters are important for both buyers and sellers at different points in the process.
Buyers have a better chance of getting their offers accepted if they have at least a pre-approval or a conditional mortgage commitment letter. Having a mortgage commitment letter can also help you budget and try for homes within your realistic price range.
Sellers look for potential buyers with a mortgage commitment letter because it reduces the odds that something will go wrong, and they’ll have to put the house back on the market.
Here’s a quick example of what you can expect from a mortgage commitment letter:
Lender: Financial Institution Buyer: Your Name, Your Partner’s Name Date: 1-01-2022
1201 Big Bank St. 1440 Dream Life Ln. Loan Number: 10001
Smithville, MN, 12345 Pleasant View, CO, 54321
Property Address: 4151 Moving Up Dr. Smithville, MN, 12345
Financial Institution is pleased to inform you that we’ve processed your mortgage loan application, and your application has been approved. The approval is subject to the following conditions:
Product: Fixed Rate Mortgage
Loan Amount: $350,000
Loan Term: 360 Months
Loan Type: Conventional
Loan Purpose: Purchase
Interest Rate: 3.31%
Origination Charges: $1,750
This mortgage will be repaid over 360 months with a monthly payment of $1,535, including principal and interest. An additional monthly payment of $584 per month will cover taxes and fees on the loan. There is no prepayment penalty for this mortgage.
This loan offer will expire at midnight on 2-01-2022. Each person signing this letter fully understands its contents and acknowledges that they have read and received it.