What Is A Mortgage Commitment Letter?

A mortgage commitment letter is a formal document from a lender stating their intent to provide a borrower with a mortgage loan. It signifies that the borrower has passed the initial underwriting process and meets the lender’s criteria. It is also known as a mortgage approval letter.

This letter helps buyers understand their eligible loan and assures sellers that the buyer can secure the mortgage after agreeing to buy their home.

You should be aware of two types of mortgage commitment letters: conditional and final. While both types serve the same purpose, some important differences can impact the home-buying process. Here’s what you need to understand about both types of commitment letters:

1. Conditional Mortgage Commitment Letters

Conditional commitment letters are significantly more common than final ones. They mean the buyer will be approved for the loan, but a few conditions must be met first. Usually, those conditions include: 

1. The appraisal. 
2. Proof of homeowners insurance. 
3. Proof of a down payment in advance.
4. The buyer’s credit score and income cannot change between when the letter is issued and when they receive the mortgage.  
5. Final Mortgage Commitment Letters

2. Final Mortgage Commitment Letters

The final commitment letter is typically provided after the buyer has met all the conditions outlined in their conditional letter.

In rare cases, financial institutions may issue a final commitment letter without first providing a conditional letter. The final commitment letter contains mortgage details, such as the loan term, interest rate, and type of loan.

How to Get a Mortgage Commitment Letter? 

1. Get a Mortgage Pre-qualification

Getting pre-qualified is the first step if you’re looking to obtain a commitment letter. You can get prequalified even before you have a specific house in mind, which is helpful because it can assist you in finalizing your budget and understanding the type of homes you should consider.

All you need to do is provide financial information to your potential lender and request prequalification. The lender will also run a credit check to understand your financial history. Sometimes, this check will be a hard inquiry, impacting your credit score going forward.

However, other lenders may only conduct a soft check initially and reserve the hard inquiry for later.

2. Apply For Preapproval 

The pre-approval process is similar to the prequalification process but is more thorough. Its purpose is to ensure that 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 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 conduct a hard credit check, if they haven’t already, to ensure you’re in good standing before finalizing the amount.

3. Get Your Commitment Letter Issued

After your pre-approval details are finalized, the bank or financial institution will issue your commitment letter. This will usually be a conditional letter, meaning you still need to take a few more steps before finalizing your approval.

You’ll need to submit more paperwork to obtain your final approval letter, 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.

When Do You Get a Commitment Letter? 

It’s important to remember that getting your mortgage commitment letter should happen in two phases.

• First, you can get your conditional letter before you have a house in mind. This document simply certifies that you meet the financial criteria for a loan.
• Then, to get your final commitment letter, you’ll need to have a specific house in mind and be in the process of making the purchase. This is important because you’ll need an estimate of the home’s value, an approved inspection, homeowners’ insurance, and other details in place before finalizing the commitment letter.

Does a Loan Commitment Letter Mean You Are Approved? 

The most common form of a mortgage commitment letter is a conditional letter, which isn’t quite the same as an approval. This is because the bank still needs to finalize your loan details, and they can’t do that until you’ve found a home and completed some of the final paperwork before purchase.

A commitment letter guarantees you’re eligible for a loan, but your home and the rest of your finances must be in good shape before you get your final approval.

Why Are Commitment Letters Important? 

Mortgage commitment letters are crucial for both buyers and sellers at different stages of the process. Buyers holding at least a pre-approval or a conditional mortgage commitment letter have a higher chance of having their offers accepted.

It can also assist you in budgeting and finding homes within your realistic price range. Sellers seek out potential buyers with a mortgage commitment letter because it reduces the likelihood of something going wrong and the need to put the house back on the market.

Bottom Line

In essence, a mortgage commitment letter is a crucial document in the home-buying process. It is a formal declaration from the lender of their intention to finance the borrower’s home purchase, subject to certain conditions being met.

Having a mortgage commitment letter in hand is one of the best ways to ensure a smooth underwriting process. Additionally, it can make your offer more appealing to sellers. A secure offer provides home sellers with confidence that the sale will go through.