A mortgage commitment letter is a step beyond pre-qualification and pre-approval and could give a homebuyer an edge in a competitive market. It lays out the loan details and indicates that a buyer has an agreement for a mortgage.
But who should obtain a mortgage commitment letter and when? Read on for the answers.
What Is a Mortgage Commitment Letter?
A mortgage commitment letter — conditional or final — is a step close to finalizing a mortgage but short of “clear to close.” The letter signals to the seller that the buyer and a chosen financial institution have forged an agreement.
Buyers may seek a conditional mortgage commitment letter when they’re house hunting, and a final commitment letter when they’re ready to make an offer on a specific home.
In both types of loan commitments, the lender outlines the terms of the mortgage.
Recommended: Buying in a Seller’s Market With a Low Down Payment
Types of Mortgage Loan Approvals
In the mortgage process, buyers will hear “approval” thrown around a lot. But not all approvals are built equally, and each type signifies a different part of the process.
Pre-qualification
Getting pre-qualified is often an early step for buyers in the home search. It’s quick, can be done online, and doesn’t require a hard credit inquiry.
To get pre-qualified, buyers provide financial details, including income, debt, and assets, but no documentation, so this step serves as an estimate of how much home they can afford.
Pre-qualification can help buyers create a realistic budget, but the amount, interest rate, and loan program might change as the lender gets more information.
Pre-approval
Pre-approval is slightly more complicated, requiring a hard credit inquiry and documentation from the buyer.
Lenders may ask for the following:
• Identification
• Recent pay stubs
• W-2 statements
• Tax returns
• Activity from checking, savings, and investment accounts
• Residential history
Armed with this information, a lender will give buyers a specific amount they’ll likely qualify for.
Pre-approval also shows sellers that a buyer is serious about a home, as it means a lender is willing to approve them for a mortgage.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Conditional vs Final Commitment
Pre-qualification and pre-approval can be important steps during the home search. But especially in a seller’s market and in certain cities, the mortgage commitment letter can become an important tool.
While a mortgage loan commitment letter can show a seller that the buyer is serious, not all letters are the same.
A conditional mortgage approval letter, the most common type, means that the lender will approve buyers as long as they meet certain conditions.
Conditions could include:
• No change to the buyer’s finances before the closing date
• Proof of funds to cover the down payment and closing costs
• Passing of a home inspection
• An appraisal
• Proof of homeowners insurance
• No liens or other problems with the property title
A final commitment letter means the lender has unconditionally approved the buyer for a loan to purchase a home. However, this doesn’t mean the buyer is guaranteed a loan; it just means the lender is ready to approve the mortgage.
Having a mortgage commitment letter in hand is a good way to ensure that nothing will go wrong during underwriting.
Recommended: See Local Housing Market Trends by City
How to Know If You Need a Mortgage Commitment Letter
Buyers don’t need to provide a mortgage commitment letter to a seller. Still, that extra step beyond pre-approval indicates how serious they are about a property.
Since it may require a little extra work, it shows sellers that a buyer is less likely to back out, especially due to financing issues.
A mortgage commitment letter could convince a seller to take a buyer more seriously in a seller’s market. And it could calm the nerves of buyers who face home-buying angst, including the challenge of covering a down payment and closing costs (even if they plan to roll closing costs into the loan).
How to Get a Mortgage Commitment Letter
Getting a mortgage commitment letter might sound like a hassle during an already stressful home-buying process, but doing so could save buyers time and provide a sense of relief as they creep closer to closing.
First off, buyers will need to be pre-approved. If they have chosen a home, once under contract, their lender or underwriter will want more information, which may include:
• A gift letter if another party is helping with the down payment
• Employment verification
• Explanation of any late payments
• Proof of debts paid and settled
From there, it could be a back-and-forth between the lender and buyer, with the lender asking for clarification or additional documentation. Common issues that arise include:
• Tax returns with errors or inconsistencies
• Unexplained deposits into buyer bank accounts
• Multiple late payments or collections on a credit report
• Unclear pay stubs
At this point, the lender may grant a conditional commitment letter, with the caveat of additional information and an appraisal. If the buyer has an appraisal and meets lender expectations with documentation, they’re likely to get a final commitment.
Contents of a Commitment Letter
A commitment letter will vary from lender to lender but generally include the following details:
• Loan amount
• Loan number
• What the loan is for
• Type of loan (FHA, conventional, etc.)
• Lender information
• Expiration date of the commitment letter
What happens after the commitment letter? The lender and underwriter will continue to iron out the mortgage details, aiming for clear-to-close status before the closing date on the property.
The Takeaway
A mortgage commitment letter is like a short engagement before the wedding: It signals an agreement before the real deal. Buyers in an active seller’s market might find a mortgage commitment letter advantageous.
Shopping for a mortgage? SoFi can help.
With mortgage tools and resources, SoFi is an online mortgage lender designed to guide buyers through the process, and qualifying first-time homebuyers can put just 3% down.
Getting pre-qualified is a snap.
FAQ
How long does it take to get a mortgage commitment letter?
It typically takes 20 to 45 days to get a mortgage commitment letter. The average closing process takes 50 days.
Does a mortgage commitment letter expire?
Yes.
How long is a mortgage commitment letter valid?
Timing can vary by lender, but the length of commitment is typically 30 days.
Photo credit: iStock/MartinPrescott
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