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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.
- A mortgage commitment letter is a document stating that a lender has reviewed your application and finances and intends to give you a loan
- The mortgage commitment letter is the proof of your "preapproval" status, signaling to homesellers you’re a serious buyer with backing
- These letters may be conditional, meaning you must meet basic requirements such as getting homeowners insurance
- Mortgage commitment letters have a time limit and can expire
What is a mortgage commitment letter?
A mortgage commitment letter is a document from a lender, verifying that it 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 to obtain financing to purchase a home.
However, while it names a figure, a mortgage commitment letter doesn’t necessarily guarantee you’ll get a loan for that amount for a particular property.
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.
Conditional mortgage commitment
A conditional mortgage commitment letter is the more common type, the one that indicates you’ve been preapproved for a loan. It doesn’t mean you’re sure to get the loan or even the specific sum the lender mentions. It simply 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
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.
Despite these limitations, the conditional mortgage commitment letter usually satisfies sellers that you are a serious buyer who has the financial backing for an offer you make.
Firm mortgage commitment
As the name implies, a firm mortgage commitment is more of a solid promise 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 on the letter). Occurring farther along the road, It is evidence that you’ve formally applied for a loan, answered all the questions in the application process, and the lender is ready to loan you the money — a specific sum for a specific property (in contrast to the conditional letter). You might need to pay a commitment fee for this “firm” commitment to take effect.
Both sorts of mortgage commitment letters have expiration dates on them, indicating how long the offer on its current terms is good for.
When do I get a mortgage commitment letter?
You can get a mortgage commitment letter (conditional version) by going through the mortgage preapproval process. Usually, that involves filling out a form with your lender and providing them with some basic financial information. Most people do this near the beginning of their home search.
Once you’ve gotten preapproved, your lender will send the commitment letter outlining the details of the potential mortgage.
A final mortgage commitment letter usually arrives after you have made an offer on a home and formally applied for a mortgage; it means the lender has finalized the underwriting (its background check into your financial affairs, credit history and employment record) and is agreeing in principle to giving you a loan.
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 one), 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 (or their agent). 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 more seriously. It proves that you have funds at your disposal.
Mortgage commitment letter FAQs
What a lender is willing to lend and what you can truly afford are different things. While the lender may believe that you can swing the payment on the maximum loan they’ll give you, that doesn’t mean it’ll be a good fit with your lifestyle, budget and expenses — especially in your new home. You don’t want to end up house poor — spending almost all your income on the home and strapped on everything else.
Just because they offer it doesn’t mean you have to take all of it. Using a how much house you can afford calculator is a better way to see how much you can reasonably borrow and handle month-to-month.
If your mortgage commitment letter expires, you’ll just have to go back to your lender to get a new one. They may want updated paystubs and bank statements and may take another look at your credit before issuing a new letter. Depending on how your situation has changed, the lender may change the details in the letter, such as the maximum loan amount.
A mortgage commitment letter is not the same as final approval, but it shows that you’re in a good position to buy a home. Once you make an offer on a home and the seller accepts it, you can move on to the full application process, which involves a more in-depth review of your finances and the property you want to buy.
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 closing. 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 interest rate lock. Don’t be afraid to ask your lender about anything you don’t understand.
Now, it’s time to put that letter to work and find a home to buy. Once it’s accepted, be responsive to all questions from your lender, and avoid making any common financial mistakes prior to closing day.
Additional reporting by T. J. Porter