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You’ve chosen your lender, and you’ve got your eyes on the perfect house. 🏡👀
The next step is to put an offer in.
Including a mortgage commitment letter with your offer can help you stand out to a seller. The letter shows that you’re a serious buyer, and a lender has promised to finance your home buy.
So, what’s a mortgage commitment letter and how do you get one? We can’t wait to tell you all about it! We’ll explain how a mortgage commitment letter is different from a mortgage prequalification or preapproval. And we’ll explore the variety of mortgage commitment letters you’ll find in the mortgage universe.
What Is a Mortgage Commitment Letter?
Mortgage commitment letters are like the engagement rings of mortgages. 💍
They are a promise from your mortgage lender to lend you the money you’ll need to buy a home.
Like an engagement, a mortgage commitment letter is an important step toward sealing the deal (in this case, buying a home). The letter shows sellers that you’re a serious buyer. It’s proof that a lender is interested in lending you money.
Spoiler alert: A mortgage commitment letter is not the equivalent of “putting a (wedding) ring on it.” It’s not a mortgage contract, so it’s not legally binding.
Lenders issue mortgage commitment letters after deciding how much they’ll lend you, and an underwriter has thoroughly reviewed your finances. A commitment letter will include how much money you’re eligible to borrow, what type of loan you’re getting and other loan terms (think: the interest rate and length of the loan).
Sample commitment letter
Each lender’s mortgage commitment letter may look slightly different, but they all share a few crucial details. Let’s check out a sample final approval mortgage commitment letter.
Lender: Earl Grey Home Lenders
Borrower: Harper Taylor
Loan number: 9876543
Home address: 5678 Elementary Street, Atlanta, GA 30301
Dear Harper Taylor,
You have been approved by Earl Grey Home Lenders for a $145,000 mortgage. This loan commitment expires on 01/31/2023. You must close on a real estate property prior to this date to remain eligible for the mortgage loan. This loan is contingent on the terms and conditions outlined below.
Loan term: 180 months
Loan type: Conventional
Product: Fixed-rate mortgage
Loan purpose: Home purchase
Interest rate: 5%
Interest rate lock end date: 01/31/2023
Origination fee: $1,000
You’ve qualified for a fixed-rate mortgage loan to be paid in 180 equal payments of $1,147. This mortgage will require an escrow account for property taxes and home insurance.
Both parties signing this document acknowledge and understand the mortgage agreement as laid out above.
What Are the Different Types of Commitment Letters?
There are two types of mortgage commitment letters: conditional approval and final approval. Most buyers will get a conditional approval letter. So, what’s the difference – and which one gives you that edge to finally close on a home?
Conditional approvals are issued before the offer process. A conditional approval letter indicates that a lender is willing to lend you the money you want to borrow, but there are a few conditions you’ll need to meet first. Because your approval is conditional, the loan isn’t guaranteed.
Every conditional commitment letter should contain the following:
- A statement of preapproval
- The loan type
- The loan amount
- A commitment date
The letter will also include the conditions that make your approval conditional. Here are some of the most common conditions you’ll find on a conditional commitment letter:
- Title verification
- Homeowners insurance
Final approval can be the next step once the conditions in your conditional approval letter are resolved, and you’ve made an offer on a house. Our sample letter (scroll up) is an example of a final approval letter. This type of letter is more specific about the details of the loan.
Every final approval commitment letter should contain the following:
- The loan type
- The loan amount
- A commitment date
- The loan term
- The interest rate
- The origination fee
- Escrow details
How Is a Mortgage Commitment Letter Different From Other Approvals?
When you’re applying for a new job, who are you going to ask to be your reference? Your direct manager or your office bestie who works in a totally different department? In short, a mortgage commitment letter is a stronger reference than a mortgage preapproval or prequalification.
There are three tiers of mortgage approvals. They range from basic to robust. And on a scale of basic to robust, loan commitment letters are the most valuable approvals to have – and the hardest to come by. Lenders (and sellers) put more weight behind a mortgage commitment letter than they do with a prequalification or preapproval letter.
Prequalification is basic. It’s a quick, informal look at your finances. A mortgage lender uses the information you give them to create a loan estimate and outline which loans you may qualify for. Prequalifications have earned their “basic” designation on our approval scale because, at this stage, it’s the lender taking your word for it. None of the information you provide is verified.
Preapprovals are a step-up from prequalifications (a big step-up). During preapproval, a lender takes an in-depth look at your finances, verifying your finances and running a hard credit check. Make no mistake, a preapproval letter is still an estimate, but it’s a far more accurate estimate of what you can borrow, what interest rate you qualify for and other loan terms.
There are a few steps that go into getting preapproved for a mortgage, and the process takes much longer than prequalification. It’s a strong letter to have in hand because it broadcasts to all the home sellers out there that a lender has verified your finances and credit history. What they see on the preapproval letter is likely pretty close to what you’ll be approved for.
To get preapproved, you’ll need to fill out a mortgage application and provide supporting documents, like bank statements and tax returns.
Mortgage commitment letter
Once the underwriting process is completed, your lender can issue a loan commitment letter. Think of the letter as your lender officially agreeing to finance your home purchase.
The commitment letter is proof that, financially speaking, you’re good to purchase homes in your price range. With that kind of validation, you should feel confident about making an offer on that house you’ve had your eye on. 🏡👀
Remember, a commitment letter is not legally binding. It’s more of a pledge by the lender to lend you money. Ultimately, nothing is finalized or legally binding until you sign the mortgage contract. Until that happens, you or the lender can back out of the sale if circumstances change.
What Happens After You Get a Mortgage Commitment Letter?
The length of time between final approval and closing can vary based on many factors, including your closing date, when you filled out the mortgage application and more. If you get a conditional commitment letter, that can tack time onto the process while you work to meet the conditions outlined in the letter.
The next major step after receiving the mortgage commitment letter is fulfilling any of the conditions and starting the actual purchase process. You’ll need to submit an offer, negotiate and set a closing date. Before your loan gets final approval, a lender will require an appraisal of the house. The appraisal will tell you and the lender how much the house is worth.
Generally, a lender won’t let you borrow more than the appraised value of the house. And that remains the case even if you got approved for a larger loan.
The appraisal requirement could help keep you from paying more than the home is worth, which is beneficial in the long run.
Congratulations on Your Commitment
A mortgage commitment letter will give your purchase offers more weight because your lender has made that financing pledge. While it’s not a legally binding contract, a mortgage commitment letter does send a strong message to sellers that you and your lender are prepared to walk to the closing table.