The home buying process can be complicated, with many steps, details and different levels of approval. One important stage in the process is obtaining the mortgage commitment letter. Read on to learn what the mortgage commitment letter is and why it’s important when buying your home.
What Is A Mortgage Commitment Letter?
A mortgage commitment letter (also called an approval letter) is an agreement between a buyer and their lender outlining the agreed-upon terms of a mortgage. It signifies that financing is officially approved.
Getting to the mortgage commitment letter is an exciting step in the process because it signifies to you and the sellers that you’ve been through the underwriting process and your loan application has been approved.
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How Do You Get A Mortgage Commitment?
There are several steps involved in getting approved for a mortgage and getting that mortgage commitment. Once the preliminary steps are taken, the last and most significant sign of approval from the lender is a mortgage commitment letter. But before you get there, you’ll have to pass two other types of approval.
Mortgage Commitment Stages
When it comes to getting a mortgage, there are usually three types of approval you’ll get. And each one holds more value than the one before it.
First approval: prequalification. This approval is at the beginning stages of your home buying journey and may even happen before you find the home you wish to purchase. This first approval will give you an idea of how much house you can afford. While lender policies will vary, prequalification is usually free, done online or over the phone and is achieved within less than a day.
To get prequalified, you’ll need to provide some basic information to the lender, including your income, assets and any debts you have. The lender may also want to look at your credit report to verify your information and review your credit score and history. All of this information will help the lender determine an estimate of how much you can afford to borrow.
Second approval: preapproval. A preapproval shows sellers you are a serious buyer and proves that you are eligible for a loan – meaning you’ll actually have the funds to purchase the home. That’s because this type of approval involves a mortgage application and requires the lender to look deeper into your current and past finances.
To get preapproved, you’ll fill out a mortgage application and submit a few pieces of information and supporting documents. These will include bank statements, W-2s and asset statements. If it hasn’t already, your lender will also pull your credit report to view your payment history and credit score and check for any red flags. This information will help the lender determine whether to lend to you and what the risk would be in doing so. This information will also help determine the terms of your loan.
Third approval: mortgage commitment letter. Once your submit your mortgage application and provide the necessary documents, you’ll need something else to get the mortgage commitment letter – information on the home you wish to purchase. During this time, your loan will go through underwriting and loan processing. Before the commitment letter, both you, the borrower, and the home you wish to purchase will need to be approved. You will need to have a signed purchase agreement and an appraisal will need to be done on the home.
There will also be a title search conducted to make sure the home doesn’t have any other liens on it and that the sellers have the right to sell the home. Once everything checks out and you’re officially approved for the loan, you’ll receive a mortgage commitment letter.
What’s Included In A Mortgage Commitment Letter?
Mortgage commitment letters include specifics about your loan. What’s exactly included will depend on the lender. However, most will typically include such information as the loan amount, loan purpose, length of your loan term and whether you’re getting an FHA or conventional loan or other type of mortgage. The letter will also feature your lender’s information, your loan number, and the date your commitment letter will expire. You’ll also find the terms of you loan listed in the letter. These may include the amount of money you’ll pay each month and the number of monthly payments you’ll make until the loan is paid off. If you’re going to have an escrow account, you’ll find information on that as well.
There are two main kinds of commitment letter: conditional commitment and final commitment.
Most commitment letters are conditional, which means the lender agrees to fund the mortgage as long as certain conditions are met within a certain time frame. Conditions may vary per lender and borrower, but a few examples of common conditions outlined in a mortgage commitment letter include:
- The buyer must provide additional documents.
- There cannot be a change to the buyer’s credit score or income.
- The property must pass a home inspection.
- There must be proof of a homeowners insurance policy.
- The buyer must show they are able to make the required down payment.
Final commitment means the lender promises to lend you the specified amount without condition. It’s important to know there is an end date on this type of approval, and if the loan isn’t funded within that period of time, the offer expires and you would need to reapply for the loan.
Mortgage Commitment Letter Sample
While mortgage commitment letters will vary between lenders, they should have similar key information. Most will look something like this:
Mortgage Loan Commitment
Lender: Home Run Lending Borrower: Jon and Jane Smith Date: 04/01/2020
1234 Main Street 5678 South Street Loan number: 32145
Detroit, MI 48226 Lansing, MI 48901
Property Address: 12345 State Street, Springfield, IL 62704
Home Run Lending is pleased to inform you that your loan application has been approved subject to the terms and conditions set forth in this letter.
This commitment will expire on 04/08/2020. Your loan must close and fund prior to this date.
Loan Amount: $130,000 Loan Term: 360 Months Loan Type: Conventional Product: Fixed
Loan purpose: Purchase Interest Rate: 4% Interest Rate Lock Expires: 04/08/2020
This is a Standard Fixed Payment Mortgage. It will be repaid in 360 equal monthly payments of $630 including principal and interest. An escrow fund is required for property taxes and insurance. The monthly amount paid to escrow is $340.
Origination charges: $1,500.00
This mortgage has no prepayment penalty.
Each person signing this document acknowledges receipt of this document and understands the information contained within it.
BORROWER’S SIGNATURE DATE AUTHORIZED SIGNATURE DATE
What If The Loan Doesn’t Fund In The Specified Time Frame?
As stated above, if the funding doesn’t go through in the amount of time outlined in the letter, for whatever reason, but you still do want to get a mortgage through the lender, the entire process will need to be started all over again. Keep in mind that your new loan may look different for the previous one that expired. For example, interest rates fluctuate and you may get a different rate entirely, which can impact the amount you’ll pay each month.
A mortgage commitment letter lays out important information on your loan, including terms that you and your lender agree to uphold. It is the final approval you have for getting a loan, showing that you’ll be getting the financing you need to purchase a home.
If you want to learn more about mortgage commitment letters or are thinking about buying a home, speak with a mortgage expert to get your questions answered or to start the process of getting a mortgage.