Buying a house is a major milestone, but it can be challenging to get your offer accepted if you’re competing with multiple bidders. One way to show sellers that you’re a serious buyer is to provide a mortgage commitment letter with your offer. This document indicates that a lender intends to approve your application for a home loan.
Learn more about what a mortgage commitment letter is and how it can help your homebuying offer stand out.
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What is a Mortgage Commitment Letter?
A mortgage commitment letter is a document that a lender provides after you’ve been preapproved for a home loan. This letter shows the lender’s commitment to approve you for a mortgage, so long as you meet any outstanding conditions and your financial circumstances don’t change.
Before getting a mortgage commitment letter, you’ll need to provide the lender with some documentation, such as bank statements, tax returns and pay stubs. The lender will begin the underwriting process on your loan and issue a commitment letter if you’re on track for approval.
Note that mortgage commitment letters, like preapprovals, have an expiration date. They may be good for 30, 60 or 90 days. If it takes longer to buy a house, you may need to reapply and provide the lender with updated information.
Types of Mortgage Commitment Letters
There are two types of mortgage commitment letters, depending on where you are in the borrowing process.
Conditional Mortgage Commitment
A conditional mortgage commitment is issued before a firm mortgage commitment. It shows that you’ve been preapproved for a home loan and should get fully approved after meeting certain conditions.
For instance, the lender will need an official appraisal of your home’s value. You’ll also need to get homeowners insurance and provide your down payment at closing.
A major change to your financial circumstances, such as a job loss, could impact your home loan approval. Although a conditional mortgage commitment doesn’t guarantee a loan, it still suggests that you’re a serious buyer who’s taking the right steps to secure a mortgage.
The specifics of a conditional mortgage commitment letter may vary by lender, but it might state:
— The borrower and lender name.
— The type of home loan.
— A statement of preapproval.
— Outstanding conditions to get final mortgage approval.
Firm Mortgage Commitment
Once you’ve met the remaining conditions for mortgage approval, your lender will issue a firm mortgage commitment. This document states that you’ve fulfilled all the requirements and the lender is committed to issuing you a loan.
“A firm commitment letter means that the financing is secured, barring any significant changes in the borrower’s financial situation or the property status before closing,” says Brian Nevins, a sales manager at mortgage company Bay Equity.
Along with containing some of the same information as the conditional mortgage commitment letter, the firm commitment letter may state:
— The address of the property you’re purchasing.
— Approval for the loan.
— The amount, repayment term and interest rate of the home loan.
When Do You Get a Mortgage Commitment Letter?
You can get a conditional mortgage commitment letter after getting preapproved with a lender. The preapproval process requires you to fill out an application, submit documents and permit a hard credit check.
Once the lender has all the information it needs from you, it can issue a conditional mortgage commitment. You can include this commitment letter when you make an offer on a home.
A firm commitment letter usually comes later in the homebuying process, after a seller has accepted your offer on a home. You’ll formally apply for the loan, and the lender will proceed with the underwriting process.
Once you’ve met all the conditions for approval, the lender will issue the firm commitment letter.
Does a Mortgage Commitment Letter Mean You’re Approved?
A mortgage commitment letter does not mean you’re approved for a mortgage…yet.
“It indicates that the borrower is likely to receive financing, but it is not a final approval,” says Nevins.
After receiving a conditional mortgage letter, you’ll still need to get your home offer accepted, buy homeowners insurance, get an appraisal and provide a down payment, among other steps.
A firm mortgage commitment letter is a more solid offer for home loan approval. However, you’ll only be officially approved after you sign all the documentation at closing.
Why a Mortgage Commitment Letter Is So Important
A mortgage commitment letter is a reassuring document to have on your homebuying journey. It shows that you’ve successfully completed the initial steps to getting a mortgage and are on your way to securing financing.
Plus, providing a mortgage commitment letter or preapproval letter with your homebuying offer shows sellers and real estate agents that you’re a serious buyer.
“If a buyer backs out of a deal because they can’t afford it or their financing falls apart, that doesn’t look good for the seller,” says Clare Trapasso, executive news editor of Realtor.com. “That’s why sellers pay close attention to whether the buyers can prove their ability to get the financing needed to purchase the home.”
In a multiple-bid situation, you want to do whatever you can to stand out from the pack. Including a mortgage commitment letter in your offer is one step that can help.
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What Is a Mortgage Commitment Letter? originally appeared on usnews.com
