Interested homebuyers frequently overlook a crucial step in the process of buying a home: a loan commitment letter.
What's in this article?
Don’t confuse this essential document with a pre-qualification letter or a pre-approval letter, both of which are also significant steps but not the ultimate goal.
Without a loan commitment letter, you could find yourself in even stiffer competition for your dream home.
Knowing how much financing you can obtain is paramount 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?
- When should I get a loan commitment?
- How long does it take to get a loan commitment letter?
- Can a loan be denied after receiving a loan commitment letter?
- How long does it take to close after I obtain a loan commitment?
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 (and while some people even use the terms 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
Historically, this stage has taken 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 when they are ready to begin looking for a home.
Knowing a reasonable price range in which to search will save time and effort.
Pre-approval
To get a pre-approval letter, a mortgage lender obtains the buyer’s credit score, pay stubs and bank statements, in order to assess the likelihood that the lender will repay the loan.
Previously, it was a good idea to have a pre-approval letter in hand. That is because purchase offers accompanied by a pre-approval were considered more substantial.
Loan commitment (Hint: This is what you need!)
Ready for your loan commitment letter? Click here.
In the past, after the seller had accepted a buyer’s offer, the buyer could request multiple loan estimates from different lenders to find the best terms and conditions.
Once the buyer decided on a mortgage lender, that lender reviewed the buyer’s file and provided a loan commitment letter (provided all qualifications were met).
If pre-qualification has been a good ‘first step’ and pre-approval what traditionally followed in mortgage application, then securing a loan commitment has definitely come to the fore as the ultimate goal for this part of the process.
Pre-qualification and pre-approval evaluate only the buyer, but a loan commitment considers both the buyer and the property.
Good news: Compass Mortgage now can give you a loan commitment subject to an evaluation of the property you wish to buy.
Remember: 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, buyers provide up-to-date documentation of their income sources, financial position and creditworthiness. This information can be analyzed prior to finding a home.
The property itself is appraised and compared to the purchase price, and it may also be inspected for safety-related concerns and for needed repairs.
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Why is a mortgage commitment letter important?
Since the overall real estate market frequently changes 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 loan 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 before finding a home, then submitting your offer with 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.
An underwriter will evaluate the financial documents, including determination of the debt-to-income ratio (DTI) and the loan-to-value ratio (LTV) which must be within guidelines.
As soon as the underwriter approves the loan commitment, a letter confirming the commitment is issued to the borrower.
Once the appraisal is approved, your loan can close in as little as fifteen days.
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 slogan; it’s who we are.
Getting hold of a loan 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 pre-approval to help you buy the home of your dreams.
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