What is a Mortgage Commitment Letter?

To become an owner, you will consult many documents related to your mortgage and the purchase. One of these essential documents is the mortgage commitment letter.

What is a mortgage commitment letter?

A mortgage commitment letter is a document from a mortgage lender that verifies that they intend to approve your home loan, as long as you continue to comply with what was submitted in your application. When you receive one of these letters, it means the lender has completed reviewing your application, credit score, and personal finances and all signs point to a successful underwriting process. The letter serves as proof that you are pre-approved and on track to close the deal.

Types of Mortgage Commitment Letters

While you may think a commitment means “yes”, commitment letters aren’t created the same in the mortgage world. There are two types of these letters with different implications for your purchasing power:

Firm mortgage commitment

As the name suggests, a firm mortgage commitment is a guarantee that the mortgage lender will lend you the money you need to buy a home based on your current financial situation as of the date shown on the letter. It’s proof that you’ve answered all the questions you might expect in the mortgage process and that the lender is ready to lend you the money. You may need to pay a commitment fee for this “hard” commitment to take effect.

Conditional mortgage commitment

A conditional mortgage commitment letter does not mean that you are approved for the loan; this means that the lender agrees to help you buy a house if certain conditions are met, such as:

  • A building inspector assesses the property and any issues that arise are resolved
  • An appraiser verifies that the house is worth at least the price you agree to pay
  • There are no major changes in your finances before closing
  • You have enough money to cover the down payment and estimated closing costs
  • You have taken out home insurance
  • There is no problem with the title

Since the lender is lending you a large sum, he must be sure that you will be able to repay it. If not, he can sell the house and get at least some of the money back. These terms are designed to provide additional protections to the lender. As a borrower, you will need to ensure they are all adhered to.

Does a Mortgage Commitment Letter Mean I’m Approved?

Commitment is not synonymous with approval. While getting a firm or conditional commitment is good news for your home buying journey, it’s not the end of the application process. You may still need to provide additional documents and you will need to stay the course until the closing date.

Why is the mortgage commitment letter important?

A mortgage commitment letter is a crucial document that shows you are a qualified buyer. Although the mortgage commitment letter may be addressed to you, you will want to show it to two other parties: the real estate agent who is helping you with your search and the seller of the house you wish to buy. In today’s housing market especially, if you’re competing with another buyer who needs financing but doesn’t have a letter of commitment, you’re more likely to have the seller consider your offer. – letter included – more seriously.

Next steps

You might receive your mortgage commitment letter within minutes or a day of submitting your loan application, but you still have a lot of steps to check off before you get to the finish line. If it’s a conditional commitment, you’ll need to pay close attention to the terms to ensure you accommodate all of the lender’s demands. Although this is a firm commitment, it is not an indefinite promise to lend you money. It probably includes a certain window – 45 days, for example – for the terms of your loan. This window usually aligns with your lock rate.

So it’s time to put that letter to work and submit an offer for a house. Once accepted, answer all of your lender’s questions and avoid making common mistakes with your finances before closing day.

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