Mortgage preapproval vs. loan commitment: What’s the difference?

The mortgage process contains many steps and terms that can be confusing for a new buyer to navigate on their own.

You may wonder how preapproval is different from approval, or what a loan commitment represents in the process.

What's in this article?

What is a mortgage preapproval?
What is a loan commitment?
How do preapproval and loan commitment differ?
Does a loan commitment letter mean I’m approved?
How do I get a commitment letter?
Get preapproved for a loan with Compass Mortgage

While some professionals may use these terms interchangeably, they do have their different specifications. 

We’ll help you dig into these terms to sort out what’s required of you for preapproval, how to get a loan commitment letter, and what it takes to actually get approved and into your home. 

What is a mortgage preapproval?

Mortgage preapproval is an important first step in the homebuying process. 

While some borrowers wait to get preapproved until after they have found their dream home and want to make an offer, it’s more beneficial to begin with this step so you understand how much home you can afford first.

Additionally, a letter of pre approval can go a long way in a competitive market. A seller may choose to accept your offer over another who doesn’t have pre approval. 

To get preapproved, you’ll complete a mortgage application for a lender and they will verify all the information you provide.

This information includes:

  • Recent pay stubs to prove income
  • Bank statements
  • W-2 statements
  • Down payment amount

The lender will also run a credit check. 

They perform all these steps to determine whether you can afford to repay your mortgage loan, how much of a loan they can provide to you, and the rate and terms for your loan.

Once you are preapproved, your lender will issue you a pre approval letter. 

This letter shows real estate agents and sellers that you’re a serious buyer, and that you’re able to get a mortgage loan.

Especially in competitive markets, getting preapproved before you make an offer on a home can put you ahead of the competition.

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What is a loan commitment?

A preapproval letter is an important document to help you get a step closer to homeownership, but it’s not a formal loan commitment letter.

A loan commitment letter is a formal document from your lender that says you’re approved for the loan. 

Keep in mind that this isn’t final approval, but a promise of funding as long as all conditions are met. 

This is often referred to as a conditional commitment letter whereas a final commitment letter is issued once all conditions are met. 

For mortgage loan commitment letters, a lender needs to not only evaluate the borrower, but the property they wish to buy as well.

This process includes:

  • A home appraisal to confirm the value of the home and ensure the property is a sound investment
  • Re-evaluation of a borrower’s finances to ensure nothing has changed since preapproval

If everything checks out, you’ll receive a loan commitment letter confirming: 

  • Loan type
  • Loan amount
  • Loan terms
  • Interest rate

It also will include the rate and commitment expiration dates, since your lender can only promise you a certain rate for a specified amount of time.

How do preapproval and loan commitment differ?

Mortgage preapproval generally happens at the beginning of the mortgage process. 

Loan commitment occurs after the loan conditions have been met and the lender promises to lend you the specified amount.

Preapproval helps a buyer understand what they can afford, and helps a real estate agent properly support them in their search, as well.

With a preapproval letter in hand, you can prove to sellers that a lender is willing to give you a loan if you are able to acquire full approval.

A loan commitment, on the other hand, is generally issued after a seller has accepted your offer, a purchase agreement has been signed, and an appraisal is performed on the home.

Once everything checks out, the lender issues you the loan commitment and you all will move forward with the closing process.

Does a loan commitment letter mean I’m approved?

Depending on your mortgage lender, loan commitments generally fall under two types: conditional and final.

If your commitment letter is conditional, you’ll need to meet the specified conditions first before the commitment is final.

Conditions may include a signed purchase agreement, satisfactory home appraisal, proof of title, and final underwriting approval.

If the commitment is final, or once you’ve met these conditions, this signals a promise that final approval is ahead.

How do I get a commitment letter?

For your commitment letter, you’ll have to move through the mortgage process with a trusted lender, meet all requirements and conditions, and maintain your good financial standing and credit score.

This means you will have completed a mortgage loan application, submitted all documents, and performed all the steps your lender requires.

As long as nothing about your situation changes drastically between commitment and closing, the commitment remains in place as a promise that the lender will provide the specified loan amount.

Get preapproved for a loan with Compass Mortgage

If you’re ready to move forward with a trusted mortgage lender, apply for preapproval today with Compass Mortgage.

Better yet, talk to one of our loan officers about Get Committed®, our unique program for a loan commitment which goes beyond preapproval to help you buy the home of your dreams.

Our team is set apart from the rest because of our integrity and dedication to excellence. We go above and beyond in all we do, including the ways we value, love, and respect each of our customers.

Reach out to our team today if you’re ready for an unmatched experience in your home buying journey. We can’t wait to work with you!

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