A surge in mortgage rates in recent weeks has led more Americans to apply for purchase mortgages.
What is a conditional commitment?
When applying for a mortgage, a homebuyer may receive notice of a conditional commitment. This means the lender is willing to finance the mortgage if certain conditions are met.
The lender might require the borrower to show proof of income or of the appraised value of the property.
A conditional commitment is a legal document. In this document, the lender will specify what the borrower has to do for the lender to finance the mortgage.
For example, the lender may require the value of the home, which is determined by an appraisal, to reach a certain level. In other instances, a borrower may need to show proof of homeowners insurance or pay stubs, bank statements and tax returns to show proof of income before a lender will finance a mortgage.
Once the lender has received all the required documents, it may issue a conditional commitment. In this case, the commitment would be conditional on a number of factors such as:
- The buyers’ income has reached a certain level.
- The buyers have no change in their credit scores.
- The property passes an inspection.
- A property appraisal is completed.
In addition, the lender may have other conditions that must be met to finance the mortgage such as proof of down payment, a homeowners insurance policy and proof the buyer has reserves set aside as part of the lender requirements.
One of the best reasons to ask for a pre-approval or a conditional commitment is that the process allows the buyer to know how much money he or she can borrow. This makes shopping for a home much easier.
To be sure, a conditional commitment will tell the borrower about the mortgage term, interest rate and other loan specifics. Once the borrower has meets the provisions of the conditional commitment, the bank will issue a final commitment and the loan can proceed to closing.
Conditional commitment example
Frank and Marla are buying a home. They meet with a lender about getting a mortgage. Before the lender will approve a mortgage, it gives the couple a conditional commitment letter that spells out several requirements for approval.
Among them, they must show proof of income as well as proof that their credit score is high enough to merit a 30-year mortgage at a low interest rate. Once Frank and Marla do that, the lender can review those documents, reducing the lender’s risk on the mortgage.