The home buying process can be exciting, overwhelming and frustrating all at once. This is especially the case for first-time home buyers. That said, buying a home has proven to be a fantastic investment in the U.S. over time as we discussed previously. Our objective is to help you become more knowledgeable about these matters to lower the frustrating aspects! If you’re in the market for a new home odds are you will be using a mortgage to finance the home. Getting a mortgage is a critical portion of the home buying process. Within this process a mortgage commitment letter is an essential step. Below we provide a brief explanation of mortgage commitment letters along with 7 important and helpful facts!
What are Mortgage Commitment Letters?
A mortgage commitment letter is an official document that represents the agreement between the home buyer and their lender. This document details the terms of the mortgage loan the lender is willing to extend to the home buyer. In many ways it is a formalization of the financial commitment the lender is making to the home buyer. It will often include specific details about the loan including the loan type, property address, loan term and rate. Lenders provide commitment letters usually after the pre-approval process. Many sellers will require a copy of your commitment letter as part of your offer for the home. This is especially the case in competitive home buying processes. A mortgage commitment letter helps reassure sellers that your offer to buy their home is credible. The letter means a lender is willing to provide you with financing which is where the credibility comes from. With that, let’s dive into 7 facts about mortgage commitment letters!
1. They Are Often the Third Step in Loan Approval Process
As mentioned above, when your lender issues a mortgage commitment letter, it is a written indication of the terms under which they are willing to provide a mortgage. But getting to this point isn’t always fast or straightforward. To get the lender’s commitment, you have to fill out a mortgage application and provide extensive documentation. This documentation can include your credit history, proof of income and rental history. There are two other important levels of approval you must go through before getting a commitment letter. Mortgage pre-qualification and mortgage pre-approval.
It might seem counterintuitive, but pre-qualification for the loan comes even before finding the home you wish to purchase. It is the most preliminary step that home buyers take once they’ve decided that they would like to own a home. You’re essentially putting your credit report and credit score to the test by entering the pre-qualification phase. This is a key step to knowing whether it is even feasible for you to start the home buying process.
Following the pre-qualification, you then will pursue mortgage pre-approval. At this stage potential home buyers are asking for a more in-depth information about the type of mortgage lenders are willing to provide.
2. There Are Two Types of Mortgage Commitment Letters
The content of a mortgage commitment letter can differ depending on the lender. However, there is certain information that must be outlined. The lender and borrower’s information, loan amount, loan term length, and the type of mortgage loan will all be included in the letter. But generally speaking, based on the content of the letter, the mortgage commitment letter can come in two varieties.
The majority of commitment letters are conditional in nature. The lender formally agrees to approve the loan as long as the list of conditions are met in a specific time frame. This type of letter is only issued with the assumption that the borrowers will abide by the conditions requested by the lender. Here are a few examples of what the lender could ask for in the conditional commitment letter:
- Additional documentation on income and bank accounts.
- Home inspection report for the home in question.
- Home insurance documentation.
- The income, credit score, assets and liabilities of the borrower can’t change significantly during the home buying process.
If the borrower has met all the conditions outlined by the lender, they can receive a final mortgage commitment letter. This is an official indication from the lender to the borrower that the amount specified in the letter will be approved without further conditions. Keep in mind that whether the lender will issue a conditional or final commitment letter can vary depending on their policies and the borrower’s current financial circumstances.
3. Mortgage Brokers Might Not Offer Commitment Letters
Some home buyers choose to work with a mortgage broker.
What Mortgage Brokers Do
A mortgage broker can act as an intermediary between the home buyer and lender. Therefore they will handle a lot of the paperwork, gathering all necessary information from the home buyer that is needed during the loan approval process. A mortgage broker can also negotiate the best mortgage terms for the home buyer. Mortgage brokers get paid by charging a commission percentage of the mortgage loan. Therefore they only get paid if the loan is approved. As such, a mortgage brokers’ incentives are aligned with home buyers. There are many benefits to using a mortgage broker when buying a home and convenience is at the top of the list.
Don’t Assume Mortgage Brokers Will Issue You A Commitment Letter
However, if you want to obtain a mortgage commitment letter to submit as part of your offer, a broker might not be in the position to help you. Many mortgage brokers don’t offer commitment letters as a part of their services. The main reason is that they’re simply an intermediary between you and the lender. They aren’t your lender. Even if a mortgage broker issues a commitment letter, it’s unlikely to mention a lender or the underwriter. In general, a mortgage broker does not have the authority to make many of the statements in a commitment letter. Therefore this is one disadvantage of using a mortgage broker.
4. Mortgage Commitment Letter Will Expire
During the underwriting process, the lender will assign an expiration date on the mortgage commitment letter. If the mortgage is not approved before the expiration date, the lender is no longer required to issue the mortgage loan under the previously stated terms of the loan. This usually happens when home buyers run into unforeseen obstacles while closing on their new home. Perhaps a contractor is behind schedule, the seller wants to change the closing date, or maybe the property failed one of the mandatory inspections. It’s not uncommon for the mortgage commitment letter to expire before the mortgage is fully funded.
An Expired Mortgage Commitment Letter Isn’t The End of the World
This is an inconvenience but doesn’t have to be a deal-breaker. If the letter expires, borrowers will simply have to restart the process. While this might not be a significant issue, it’s crucial to keep in mind that the loan terms might be different. As mortgage rates frequently fluctuate, the new commitment letter might show a different monthly payments. In addition if the borrowers financial situation has changed, this could also impact the terms in the commitment letter.
5. Mortgage Commitment Letter Is Not Legally Binding
Having the commitment letter in your hands is a significant milestone for home buyers. You’re only a step away from getting fully financed to purchase the home you’ve chosen. However, the commitment letter only represents an indication. It is not a legally binding document. You can still get rejected for a loan, even after the lender issued the commitment letter. Rejection can occur for a number of reasons. But usually it occurs if a borrower can’t explain big changes in their finances. For example, large withdrawals from their accounts or changes in their employment status.
6. Mortgage Commitment Letter Is Not Set in Stone
Because a commitment letter is not legally binding this also can work to the benefit of the home buyer. A home buyer can go through the entire process, receive the mortgage commitment letter, and if they have a change of heart, stop the process. Nothing is set in stone at this stage. This remains the case until the home buyer signs the closing documents and the lender issues the mortgage loan. The home buyer can change their mind even after they receive the mortgage commitment letter.
7. Mortgage Commitment Letter Sends a Strong Message
If you’re planning on purchasing a home, you don’t need to have the commitment letter to make an offer on the property. Many choose to use their pre-qualification or pre-approval letter to show sellers they can get funding. But whether that will be enough depends on the seller in question. For example, if you’re buying a home directly from a friend or relative, a pre-qualification could be a good enough indication. However, most people buy homes from sellers they don’t know, and therefore the sellers are more likely to request a commitment letter.
A Mortgage Commitment Letter Makes The Home Buying Process Easier
Home buyers (or potential borrowers) may need to wait several weeks in some cases for the lender to issue a commitment letter. Naturally, it’s easy to get impatient, but waiting for this document can be time well spent. Shopping for a home when you know you have financing lined up makes the process a lot less stressful. Also, with a mortgage commitment letter you can get a more accurate estimate of which types of homes you can afford. Remember that if the lender issues a conditional commitment letter, you will still need to meet the outlined criteria before the loan is approved. Finally, although the mortgage commitment letter represents a strong indication that the lender is willing to provide you with a mortgage loan, it is not a binding agreement for either party.