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On the path to becoming a homeowner, you’ll look over a lot of documents related to your home loan and the purchase. One of these essential pieces of paperwork is the mortgage commitment letter.
What is a mortgage commitment letter?
A mortgage commitment letter is a document from a mortgage lender that verifies it has plans to approve your home loan, so long as you continue to comply with what was submitted in your application. When you receive one of these letters, it means the lender has completed a review of your application, credit score and personal finances and all signs point toward a successful underwriting process. The letter serves as proof that you’re preapproved and on the path to being able to close the deal.
Types of mortgage commitment letters
While you might think a commitment means “yes,” commitment letters aren’t created equal in the mortgage world. There are two types of these letters with different implications for your buying power:
Firm mortgage commitment
As the name implies, a firm mortgage commitment is a guarantee that the mortgage lender will loan you the money you need to buy a home based on your current financial situation as of the date listed on the letter. It is evidence that you’ve answered all the questions to expect in the mortgage process, and the lender is ready to loan you the money. You might need to pay a commitment fee for this “firm” commitment to take effect.
Conditional mortgage commitment
A conditional mortgage commitment letter doesn’t mean you’re approved for the loan; it means that the lender is committed to helping you buy a home if certain conditions are satisfied, such as:
- A home inspector evaluates the property, and any issues that come up are resolved
- An appraiser verifies that the home is worth at least the price you agree to pay
- There are no major changes to your finances prior to closing
- You have enough money to cover the down payment and estimated closing costs
- You have a homeowners insurance policy in place
- There are no issues with the title
Since the lender is loaning you a large sum, it needs to feel confident that you’ll be able to pay it back — and if not, it’ll be able to sell the home and get at least some of the money back. These conditions are designed to provide additional protections for the lender. You, as a borrower, will need to make sure that they are all met.
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, 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.
Why is the mortgage commitment letter important?
A mortgage commitment letter is a crucial document that shows you’re a qualified homebuyer. While the mortgage commitment letter might be addressed to you, you’re going to want to show it to two other parties: The real estate agent helping you with your search, and the seller of the home you want to buy. In today’s housing market especially, if you’re competing with another buyer who needs financing but doesn’t have a commitment letter, you’ll have a better chance of the seller considering your offer — letter included — more seriously.
You might receive your mortgage commitment letter within a few minutes or a day of submitting your loan application, but you still have plenty of steps to check off before getting to the finish line. If it’s a conditional commitment, you’ll need to pay especially close attention to the conditions to ensure you take care of all the lender’s requests. Even if it’s a firm commitment, it isn’t an open-ended promise to loan you the money. It likely includes a certain window — 45 days, for example — for your loan terms. This window usually aligns with your rate lock.
So, it’s time to put that letter to work and submit an offer for a home. Once it’s accepted, be responsive to all questions from your lender, and avoid making any common mistakes with your finances prior to closing day.