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A mortgage loan commitment letter is one of the most important documents you’ll receive during the home buying process. This letter states that you have been pre-approved for a mortgage loan allowing you to make a competitive offer on your dream home. But what exactly is a mortgage commitment letter and how can you get one? This comprehensive guide will explain everything you need to know.
What is a Mortgage Loan Commitment Letter?
A mortgage commitment letter is a formal document issued by a lender stating that you are eligible for a home loan. It specifies important details like:
- The type of mortgage you are approved for (conventional, FHA, VA, etc.)
- The loan amount you qualify for
- The interest rate on the loan
- Length of the rate lock period
Lenders issue a commitment letter after you’ve successfully completed the initial steps of the mortgage process, like submitting an application, providing financial documentation, and undergoing credit evaluation.
The letter serves as proof to sellers that you are a qualified serious buyer who has been vetted by the lender. This gives you a competitive edge especially in hot housing markets where demand outpaces supply.
Why Do You Need a Mortgage Commitment Letter?
There are several key reasons why a mortgage commitment letter is so important
1. Proves You Are a Serious Buyer
As mentioned above, a commitment letter shows sellers that you have done your due diligence. You’ve established a relationship with a reputable lender, undergone financial scrutiny, and been deemed qualified for a mortgage of a certain amount. This evidence goes a long way towards making your offer more appealing than competing bids.
2. Locks in Your Interest Rate
The letter also locks in your interest rate for a set period of time. This protects you from fluctuating rates while you search for a home.
3. Strengthens Your Offer
In competitive markets where bidding wars erupt, a solid pre-approval letter can be the edge you need to beat out other offers. Sellers want confidence that the deal will close smoothly, and your letter provides that.
4. Sets a Budget
Being pre-approved for a certain loan amount keeps you from overspending. It helps you zero in on homes within your price range.
5. Speeds Up the Process
Since the lender has already vetted your financials, the rest of the transaction can proceed more swiftly once your offer is accepted. This prevents deals from dragging out or falling through.
Clearly, a mortgage commitment letter sets you up for home buying success!
Types of Mortgage Commitment Letters
There are two main types of mortgage commitment letters:
Conditional Approval Letter
Also known as a “pre-approval letter,” this letter states you are eligible for a mortgage as long as certain conditions are met. Typical requirements may include:
- Providing additional financial documents
- Meeting minimum credit score requirements
- Making a downpayment of a certain amount
- Purchasing a home that appraises for no less than the loan amount
Final Mortgage Approval Letter
Once all conditions have been satisfied, the lender will issue a final mortgage commitment letter. This guarantees that the lender will grant you a loan of a specific amount, at a locked-in interest rate, as long as you close by the expiration date.
Rocket Mortgage® refers to their final approval document as a Verified ApprovalTM letter. This provides the strongest level of mortgage commitment.
When Do You Get a Mortgage Commitment Letter?
You’ll receive a mortgage pre-approval letter after submitting your loan application and completing the initial steps of the mortgage process. This includes:
- Providing information about income, employment, assets, debts, and credit history
- Authorizing the lender to access your credit reports
- Supplying required financial documentation like W-2s, paystubs, and bank statements
- Completing an initial underwriting assessment
At this point, the lender can issue a conditional approval letter. Then, as you meet any remaining requirements, you’ll be issued the final commitment letter.
Timing wise, it’s best to get pre-approved as early in the home buying process as possible. This puts you in a position to make competitive offers right away when you find a home you want.
How to Get a Mortgage Commitment Letter
Follow these steps to obtain a mortgage commitment letter:
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Submit a mortgage application – Provide details about your financial situation, employment, income, expenses, assets, debts, and credit history.
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Authorize access to your credit – Let the lender obtain copies of your credit reports.
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Send required documents – Supply recent pay stubs, W-2s, tax returns, and bank statements.
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Complete initial underwriting – The lender will verify your financial information, debt-to-income ratio, and creditworthiness.
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Get pre-approved – If you meet the lender’s requirements, you’ll receive a conditional approval letter.
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Fulfill final conditions – Take any additional steps needed to satisfy the lender’s requirements.
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Get final approval – Once all conditions have been met, the lender will issue a final mortgage commitment letter.
Voila! You now have a letter to boost your buying power.
Does a Commitment Letter Guarantee Approval?
A mortgage commitment letter does not equal a 100% guarantee of final approval. Lenders reserve the right to revoke the commitment if:
- Your financial situation changes substantially
- You fail to meet outlined conditions
- The appraisal comes back lower than expected
- Your credit score drops significantly
- You provide inaccurate or false information
However, barring any red flags, a commitment letter does provide strong assurance that your financing is secured. As long as you uphold your end of the bargain, the lender should follow through on approving your loan.
Key Items in a Mortgage Commitment Letter
Mortgage commitment letters vary by lender, but generally contain the following details:
- Date of letter issuance
- Your name and property address
- Lender name
- Loan amount
- Loan type (conventional, FHA, VA, etc)
- Interest rate
- Length of rate lock period
- Loan term (i.e. 30 years)
- Expiration date of commitment
Review your letter carefully to ensure all information is accurate and aligned with what you expect.
What Happens After Receiving a Commitment Letter?
Being issued a mortgage commitment letter means you’ve passed the initial underwriting process. However, there are still a few more steps left before closing:
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Satisfy any remaining conditions – Provide outstanding documents or meet any other prerequisites outlined in the commitment letter.
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Complete final underwriting – The lender will re-verify your finances right before closing.
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Obtain home appraisal – The property must be valued at or higher than the loan amount.
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Close on time – Sign all your closing documents by the expiration date stated in the letter.
As long as you continue cooperating with your lender and your financial profile remains the same, you should sail smoothly towards final approval. Maintain good credit and provide any updated paperwork the lender requests.
Can the Lender Change the Terms Later?
In most cases, the terms in the commitment letter are locked in. However, here are exceptions:
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You fail to close by the expiration date. At that point, the lender could require resubmission of financial details and reassess your rates.
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The appraisal comes back lower than the loan amount stated in the letter. The lender may need to lower the approved amount.
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Your credit score drops significantly or your debt ratio increases. The lender may need to adjust terms to mitigate risk.
-
Market interest rates rise substantially. The lender may quote a higher rate if your rate lock expired.
Outside extreme circumstances, though, expect your loan terms to remain intact.
Mortgage Commitment Letter FAQs
If you’re pondering the power of a mortgage commitment letter, here are answers to some frequently asked questions:
Q: Can I back out of the mortgage even after receiving a commitment letter?
A: Yes, a commitment letter is not set in stone. Until you sign the final loan documents at closing, you can withdraw your application and discontinue the lending relationship if you choose.
Q: How long is a mortgage rate lock period typically?
A: Most lenders provide rate locks of 30 to 90 days. This gives you time to shop for a home before your locked-in rate expires.
Q: What happens if my credit score drops before closing?
A: Significant credit score declines before closing may result in your application being re-evaluated or denied. Maintain healthy credit habits to prevent this.
Q: Can I negotiate a lower interest rate later if market rates drop?
A: No, the lender will honor the rate established in the commitment letter. But you can request to float down to a lower rate if market rates decline significantly.
**Q: What if my income decreases
Does a mortgage commitment letter mean I am approved?
A commitment is not synonymous with an approval. While receiving a firm commitment or a conditional commitment are both positive pieces of news on your homebuying journey (especially the firm letter), this isn’t the end of the application process. You might still need to provide some additional documentation, and you’ll need to stay the course all the way through to your closing date.
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