Mortgage commitment letter: What is it, and how do I get one?
If you’re thinking of buying a home or already have a prospective property picked out, a mortgage commitment letter might be just what you need to finalize your home purchase. A mortgage commitment letter shows a readiness to buy and might improve your buying power. But what is a mortgage commitment letter, exactly? Let’s take a look.
Mortgage commitment letters, explained
A mortgage commitment letter is an official document issued by your lender, signifying a commitment to provide you with a loan for a specific amount. It acts as something of an affirmation, indicating that your loan application has passed the lender’s scrutiny. Obtaining a mortgage commitment letter may elevate your position as a buyer by signaling to sellers your genuine intent to purchase the property and that you have the financial support to move forward.
What’s in a mortgage commitment letter?
Although mortgage letters vary between lenders in their language and structure, a standard mortgage commitment letter typically includes a few key details:
- The loan amount
- The interest rate
- Loan term
- Any prerequisites or conditions that must be addressed before finalizing the loan, such as proof of homeowners insurance or income verification.
How long is a mortgage commitment letter good for?
In many instances, a mortgage commitment letter remains valid between 30 to 60 days. However, this timeframe can differ based on the lender and prevailing market conditions.
Types of mortgage commitment letters
There are generally two types of mortgage commitment letters your institution might offer you, each one with different implications for your position as a prospective buyer.
Conditional commitment letters
A conditional commitment letter means your lender is willing to offer you a mortgage, but there are specific conditions you must meet before the final stamp of approval. These conditions could include additional documentation, proof of income, a satisfactory property appraisal and more. A conditional commitment letter means your lender generally approves of your loan application but wants to ensure all bases are covered before moving forward. The exact requirements and conditions outlined can vary based on your lender’s standards and mortgage protocols.
Final commitment letters
A final commitment letter is an assurance from your lender to offer you a mortgage, assuming the property in question has met their standards and all conditions from the initial approval are fulfilled. These are typically issued after a thorough review, confirming the lender has vetted your financial situation and that the value and condition of the property are deemed satisfactory. A final commitment letter can signal to buyers that, barring any unforeseen issues, you have the financing to move forward with your offer. Note that different lenders may have different procedures, depending on their individual underwriting processes.
How to get a mortgage commitment letter
Let’s take a look at how most borrowers generally go about getting a mortgage commitment letter and what you should know about the process.
1. The loan application
Irrespective of your lender or financial institution, it all starts with a comprehensive loan application. This will generally require essential details about your financial status, such as employment history and creditworthiness, and information about the property you’re eyeing. Borrowers who take care to ensure accuracy here are more likely to have a streamlined process.
2. The appraisal process
If your application meets the initial qualifications, the lender typically orders an appraisal for the property you’re looking to buy. This is to ensure the property’s value is in-line with the amount you intend to borrow.
3. Underwriting
With appraisal complete, lenders typically begin their underwriting process. This is where the lender conducts a thorough review of your financial background and the property in question. During this stage, your lender will typically perform credit checks, verify your employment history and generally review all relevant financial documents to assess the risk of lending to you.
4. Mortgage commitment letter
With the underwriting process complete, the final step is getting your mortgage commitment letter in hand. If everything checks out during underwriting, the lender will generally send you the mortgage commitment letter. The type of mortgage commitment letter you receive depends on the institution and how your underwriting process went.
In summary
A mortgage commitment letter serves as a lender’s formal intent to offer you a loan. This can potentially strengthen your position as a buyer by showing a financial readiness to move forward with a purchase. Just keep in mind that there are different types of mortgage commitment letters representing various degrees of commitment.
Mortgage commitment letter FAQs
1. How long is a mortgage commitment letter good for?
A mortgage commitment letter typically remains valid for 30 to 60 days. The exact duration, however, depends on the lender and terms specified in the letter.
2. What happens after I receive a mortgage commitment letter?
After receiving a mortgage commitment letter, the next steps usually involve coordinating with your real estate agent and seller to set a closing date, meeting any outlined conditions in the letter and preparing necessary documentation for the closing.
3. Can mortgage be denied after commitment?
Yes, a mortgage may be denied even after receiving a commitment letter. If there’s a change in your financial situation, the property doesn’t meet the lender’s requirements upon further inspection or you fail to meet certain conditions outlined in the letter, the lender might rescind their commitment.
4. Does a mortgage commitment letter include interest rate?
Yes, a mortgage commitment letter typically includes the interest rate you’ve been approved for.
5. What if a mortgage rate lock or commitment expires?
If a mortgage rate lock or commitment expires, you might be subject to current market interest rates. These could be higher or lower than your initial locked rate. If your commitment is about to expire, consider communicating with your lender regarding any possible delays to help potentially avoid unfavorable terms or the need to reapply. Some lenders may offer an extension, though this may come with a fee.
