A Loan Commitment Letter—Why Do You Need It?

A loan commitment letter or mortgage commitment letter is frequently an overlooked step in the process of buying a home. 

Don’t confuse this essential document with the pre-qualification letter, which is also a significant step but not the ultimate goal.

What's in this article?

What is a loan commitment?
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Why is a mortgage commitment letter important?
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How long does it take to get a loan commitment letter?
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Can a loan be denied after a commitment letter?
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How do I get a mortgage commitment?
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Without that mortgage commitment letter, you could find yourself in even stiffer competition for that dream home.

Knowing how much financing you can get is a good plan when purchasing a home. 

Once you’ve figured out your budget and zeroed in on the home you want, it’s crucial to be seen as a serious buyer who can fulfill the agreement to buy. 

One of the best ways to succeed in your home buying journey is to secure a loan commitment letter.

In this article, we’ll explore some of the most common questions and concerns about mortgage loan commitment letters like

  • What is a loan commitment letter ?
  • How long does it take to get a mortgage commitment letter?
  • Can a loan be denied after a mortgage commitment letter?
  • How long does it take to close after receiving the mortgage commitment letter?

To help you answer these questions and others—read on. 

Click here to apply for your loan commitment letter

What is a loan commitment?

Most buyers can get confused by the qualification process, especially regarding pre-qualification, pre-approval, and loan commitment. 

While they sound like similar concepts (some places use them interchangeably), they have distinct differences for most institutions. 

It’s essential to review the steps of securing a loan and what they mean.

Pre-qualification

This stage usually takes place before a borrower makes an application for a mortgage. The pre-qualification process is a basic guide to what a buyer can afford to spend on a home.

Pre-qualification is a basic estimate—not an in-depth analysis or commitment to approve a loan. 

So, why complete this step? Pre-qualification is a valuable step for determining a buyer’s housing budget before they begin looking at homes. 

Knowing a reasonable price range to search will save time and effort in your search and lets your realtor know you are serious about purchasing. 

Pre-approval

To get a pre-approval letter, a mortgage lender will check the buyer’s credit score, pay stubs, and bank statements—assessing the likelihood they will repay the loan. 

Before making an offer on the house, it’s a good idea to have this pre-approval letter in hand. 

These documents are considered more substantial offers than offers with only pre-qualified letters. It also reassures any seller that you are on a serious level to purchase. 

Loan commitment

Ready for your loan commitment letter? Click here.

After the seller accepts a buyer’s offer, the buyer can request multiple loan estimates from different lenders to find the best terms and conditions. 

Once the buyer decides on a mortgage lender, that lender will review their file and provide a loan commitment letter. 

This letter details their intention to provide funding, conditional on the property and buyer meeting the lender’s criteria.

The big difference between the above letters is what they evaluate. 

Pre-qualification and pre-approval assess only the buyer. A loan commitment evaluates the buyer as well as the chosen property. 

To meet their portion of the agreement, the buyer provides up-to-date documentation of their income sources, financial position, and creditworthiness. 

The property itself is appraised and compared to the purchase price. The property itself may also be evaluated. 

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Why is a mortgage commitment letter important?

While the real estate market overall can heat up and cool down over time, a property that checks all your boxes in a neighborhood you love is a rare find. 

But chances are, a home you’ve got your eye on has also caught the attention of other buyers. 

Where a loan commitment letter fits into the home buying journey

A mortgage commitment letter can alleviate any seller’s fears about your ability to follow through with the funds. 

Accepting an offer that falls through because of poor financial planning is just as big of a concern to the seller as it is to the buyer. 

For this reason, and especially in a seller’s market, it’s beneficial to get a commitment letter.

How long does it take to get a loan commitment letter?

It varies, but receiving a mortgage commitment letter generally takes three to six weeks. 

Once you submit your application with all required documents, an appraisal can be ordered, and the loan file can be processed. 

The underwriter will take the appraisal and examine it with the documents. The debt to income (DTI) and loan to value (LTV) ratios must be within guidelines. 

If the underwriter approves the commitment, a letter is issued to the borrower. 

Can a loan be denied after a commitment letter?

To answer this question accurately, we need to explain the differences between conditional and final mortgage commitments. 

Conditional commitment letter

A conditional commitment letter is an approval for a specific loan amount to the borrower. But as the name suggests, some conditions have to be met first. 

A typical conditional commitment letter may contain these pieces of information:

  • The lender’s name
  • The borrower’s name
  • A statement of pre-approval
  • The type of loan
  • The loan amount
  • A list of conditions for final approval
  • The number of days this pre-approval is valid

Final commitment letter

Once the listed conditions are met, and the lender agrees to lend you a specific amount, they can create a final commitment letter. 

This final letter typically contains the following:

  • The lender’s name
  • The borrower’s name
  • A statement of approval for the loan
  • The type of loan
  • The loan amount
  • The term
  • The interest rate
  • The date of commitment
  • The date the rate lock expires
  • And finally, the commitment expiration date

A bank will often issue a mortgage commitment letter that stipulates certain conditions have to be met to secure the loan. 

If any borrower does not provide the required information or the property fails to meet specific criteria in the appraisal, the mortgage can be turned down. 

How do I get a mortgage commitment?

Click here to inquire about your loan commitment letter

The loan officers at Compass Mortgage know how important the home buying process is. We know that creating a bridge of understanding between a client and lender helps everyone. 

Our commitment to a better mortgage experience is more than just a philosophy; it’s our company motto. 

Getting hold of a mortgage commitment letter is just one part of that mortgage experience. 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.

Photo by Gabrielle Henderson on Unsplash

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