What Is a Mortgage Commitment Letter?
DH
Summary:
A mortgage commitment letter empowers you to go forward with your home purchase. It indicates that you’ve been approved for a mortgage loan of some amount provided you fulfill the conditions indicated. This document is an important step on your home buying journey because it shows you are a qualified buyer with financing that has already been conditionally approved.
You’ve spent years establishing or restoring excellent credit through prudent personal finance. You’ve got the promotions or achieved the business success needed to raise your income. By living frugally and working hard, you’ve saved enough for a down payment. And now, finally, you earn enough to afford a monthly mortgage payment for a home where you live. Or, perhaps, you’ve finally decided to move where houses are cheaper. What next?
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While your first impulse might be just to start looking at houses, getting prequalified or preapproved by one or more mortgage lenders is likely a better first step. If you”re in the market for a home, it”s smart to start by finding which lender will provide you with the best rates and terms. Even if you already have a lender lined up, make sure you compare at least three (five is better) lenders before you commit to a loan offer.
Once you do set your eye on a property, you’ll want to pursue a firmer financing commitment. That will come in the form of a mortgage commitment letter.
So, what is a mortgage commitment letter, why should you want one, and how do you go about getting it? This article explores these questions, along with several of the mortgage commitment questions we most often hear from SuperMoney users.
What is a mortgage commitment letter?
A mortgage commitment letter is your lender’s formal promise to give you the home loan you’ve applied for, provided you fulfill any stated conditions. It can be either a conditional commitment letter, meaning you and the property you want to buy must satisfy certain requirements before final approval, or a final commitment letter, the sort you’ll get when you and your lender lock in terms so you can make your purchase.
Either type of letter reflects the mortgage underwriter’s assessment that you are a good risk. In the case of the conditional commitment, the underwriter will only become fully convinced you’re a good risk when you, and whatever property you decide to buy, meet certain conditions. Among these conditions will be that your financial status doesn’t change significantly before you buy the home and that the home passes an inspection and is appraised.
What is the purpose of a mortgage commitment?
The main purpose of a mortgage commitment is to allow a buyer to go forward with a home purchase. A conditional commitment allows the process to get underway while outstanding requirements are met. A final commitment shows buyers and sellers that the former are clear to close. A mortgage commitment letter is just the last step in a longer process. Before looking more closely at conditional and final commitment letters, let’s look at the preceding steps.
Mortgage commitment stages
The level of commitment indicated by a mortgage commitment letter takes time and a process to develop. The process passes first through prequalification or preapproval, then to conditional and final commitment. Here is a quick summary of the meaning and benefits of each stage.
| Stage | Definition | Benefits |
|---|---|---|
| Prequalification letter | Preliminary approval based on a credit check (often) and a questionnaire. | It’s a rough estimate, but it allows you to know how much you can afford when you start house hunting. |
| Preapproval letter | A more precise loan estimate based on proof of financial details (as well as a credit check) | Allows you to make an offer on a property with confidence and will give you an advantage over buyers who don’t have one. |
| Conditional mortgage commitment letter | Provisional approval of a loan that is legally binding if you meet all the conditions stipulated in the letter. | You can breathe a big sigh of relief that the underwriting process is progressing well and, barring some issue with the appraisal or meeting other conditions, should end with final approval. |
| Final mortgage commitment letter | Final commitment from the lender to finance the property. Confirms that all the conditions in the preapproval or conditional mortgage commitment letter have been met. | Congratulations, you’ve survived the underwriting process. Now you just need to sign your acceptance of the offer to make the loan official. |
Now, let’s dig a little deeper into each stage and what it means for you.
Stage 1: Prequalification
Though some lenders will use the terms “prequalification” and “preapproval” interchangeably, most use them to describe different things. When prequalification is viewed as separate from preapproval, it means a preliminary assessment that a borrower could be eligible for a mortgage loan of some rough amount. Here’s an in-depth guide on how to get prequalified for a home loan.
Note: The federal agency most responsible for mortgage oversight discourages consumers from making much of the prequalification-preapproval distinction.
At this stage, the loan officer has only had a few basic questions answered — rough borrower income, employment situation, approximate funds available for a down payment, that sort of thing. Typically, these are just the rough figures provided by the borrower, none of them confirmed with paperwork or a credit check.
Some lenders may add a credit check at this stage rather than waiting till preapproval. In fact, this happens often, though it may be a soft pull (doesn’t affect your credit) rather than hard pull (does affect credit) at this point. You may also find that some lenders ask for more information during prequalification than others, possibly to the point of blurring the line between prequalification and preapproval.
Stage 2: Preapproval
A preapproval is, at best, a preapproved loan estimate. If you haven’t yet selected a property, it won’t even qualify legally as a loan estimate. Since TRID only allows lenders to require verification documents after issuing a loan estimate and obtaining your intent to proceed, lenders cannot require verifying documents for preapproval. This article explains in detail how to get preapproved for a mortgage.
TILA-RESPA regulations
When you begin the mortgage application process, TILA-RESPA integrated disclosures (TRID) requirements make it illegal for lenders to either impose fees or require verifying documents prior to providing a loan estimate and receiving your confirmation that you wish to go ahead with your loan application. Formally, your confirmation is called your “intent to proceed.” TRID does allow a fee to cover just the cost of a credit report. Fees that lenders shouldn’t charge at this stage include application fees, appraisal fees, and underwriting fees. TRID also allows borrowers to voluntarily submit any verifying documents they like; lenders just can’t require them.
Just because lenders can’t legally require verifying documents at this stage doesn’t mean they won’t ask for and expect them. In addition to completing a mortgage application, you may be asked to provide bank statements, W-2s (or equivalent proof of income, such as tax returns), a statement of assets with proof of asset ownership, and similar documents that your lender can’t require under TRID.
Verification documents will be needed
Applying TRID to preapprovals works great in theory. In practice, not so much. Since no lender is legally obligated to give anyone a preapproval letter, there’s no clear way to enforce TRID for preapprovals.
So, no matter what TRID says, you’ll usually find you can only get a preapproval if you “voluntarily” provide any financial documents lenders ask for. Any information and documents you provide, combined with your credit report, will be used to determine your loan eligibility. Your loan officer will use the information and documents you provide, along with current interest rates and requirements for the mortgage program you’re interested in, to estimate what size loan you qualify for.
In some places, you may need a preapproval just to look at properties
In some real estate markets, you could need a pre-approval just to view properties. Sellers’ real estate agents may refuse to let you or your agent view the property before you’ve proved you’re at least serious enough to have gone through pre-approval, a fairly uncomplicated process that can be completed in less than a day by phone or online. (If you have credit problems or significant recent life changes, such as a divorce, the process may not be so uncomplicated in your case. But it will be for most borrowers.)
TRID and preapproval: regulation vs. reality
That lenders do, in effect, require documents for preapproval that they aren’t legally allowed to require may trouble some readers. How can this be? Whether you think burgeoning federal regulations are benign and helpful or, like some, consider them dangerous, you will probably grant that there are a lot of them. You’ll probably also agree that a giant and growing body of complex regulations won’t always be clear to everyone and won’t always get enforced.
Enter TRID and mortgage loan preapprovals. Though mortgage loans are definitely subject to TRID, and though mortgage lenders should apply TRID to mortgage preapprovals, lenders have been known to have other ideas. An application subject to TRID technically has to include the following six pieces of information:
- Borrower’s (1) name, (2) income, and (3) Social Security number: these are required to obtain a credit report.
- (4) Property’s address and (5) estimated value.
- (6) Applied-for mortgage’s amount.
As you might have guessed, the fact that the property to be purchased is usually unknown during preapproval has led some lenders to think TRID can be circumvented at this stage.
This was true back in 2018, at any rate. At that time, Lenders Compliance Group deemed such TRID evasions a “slippery slope” and indicated “The cautious position is that once the missing…information is obtained…the preapproval application morphs into a TRID application and thus, the charge of the ‘preapproval’ or ‘preapplication’ fee becomes a TRID violation.” It applied the same reasoning to lenders asking for verification documents at the preapproval stage.
The Group left open the possibility of “further regulatory guidance” on the matter.
A final note on pre-approval. Lenders who preapprove you will provide a pre-approval letter. This is the evidence you can show sellers that you’ve been pre-approved and should be taken seriously. If you try making an offer on a property without a pre-approval letter, don’t be surprised if you’re rebuffed. Preapproval letters are good for 90 days on average, though offer expiration dates vary.
Stage 3: Conditional mortgage commitment letter
A conditional mortgage commitment is a provisional approval of a loan that is legally binding if you meet all the conditions stipulated in the letter. Any question of your financing application being subject to TRID goes away at this stage. Before you get a formal mortgage commitment letter, you will need to have chosen a property. If your preapproval didn’t qualify as a loan estimate, the mortgage commitment will.
How long does it take to get a mortgage commitment letter?
Estimates vary. Most sources estimate 30–45 days. Some indicate a range of 20–45 days. For mortgages that close unusually rapidly, in fewer than 20 or 30 days, your letter would have to come sooner.
Since legal documents and contracts always have conditions, calling some letters “conditional” to distinguish them from others can seem misleading. But the point of this distinction is to highlight that some mortgage commitments are provisional while others are not. Both types still have conditions, such as the condition that you close on a home before a certain date if you want to guarantee the loan terms specified. But the conditional commitment specifies requirements that the final commitment doesn’t need to specify, all such requirements having already been met.
Not every lender will issue a conditional letter. Competition between lenders means that most will, since house hunting in competitive markets can make them essential, but a few may only issue a formal letter when you’ve satisfied all the requirements for final approval.
Is this conditional commitment really a “commitment”?
If you read the copy on some websites, you might conclude that a conditional commitment is no commitment at all when it comes to mortgages. As some describe it, a conditional commitment letter has no more legal force than an advertising mailer or a great-deal-buy-now email solicitation. Even when it specifies conditions, however, a mortgage commitment letter is much more than advertising. It’s a formal legal document governed by the laws of your state and federal regulations. Lenders will only issue you one if they are serious about loaning you money. It’s a genuine commitment, albeit one with conditions.
Does a loan commitment letter mean I’m approved? A loan commitment letter does indicate you’ve been approved, at least provisionally. Most loan commitment letters will list conditions you must fulfill before your approval becomes final.
About these conditions, what are they?
Different lenders, more specifically their underwriters, will have different conditions for moving beyond the conditional commitment to a final commitment.
Common conditions in a conditional mortgage commitment letter
- Additional documents, such as to confirm income and assets (W2s, tax returns, proofs of ownership).
- No significant changes in borrower income or credit score.
- Appraisal of the property to be purchased.
- Passing home inspection of the property.
- Proof of property repairs, if required by home inspection.
- Proof of homeowners insurance.
- Evidence of the ability to make the down payment.
- Proof that you’ve paid off certain debts.
So, is a loan commitment letter legally binding?
Lenders would like to reserve the right to reduce or deny your loan application after issuing a conditional mortgage commitment letter — that’s why this class of letters exists. But a belated loan denial may only hold up in court if you actually fail to meet the conditions specified in the letter. If those conditions are unclear or open to interpretation, and if a court favors your interpretation over the lender’s, your lender could suffer consequences in court.
That said, lenders enlist the help of legal professionals when writing these letters, so you shouldn’t assume what your lender promises in a conditional letter is yours for the taking if you just go to court. And going to court will be costly, especially if you lose. If you’ve really done all that the conditional mortgage commitment letter requires, lenders probably won’t balk at fulfilling their commitment to the full loan amount specified in the letter. Still, if you ever do think a lender has violated a mortgage commitment letter, even a “conditional” one, speak to a qualified attorney in your state.
Avoid issues with clear communication
Realize that lenders want to loan to you — if you’re a good risk. If they back out of a conditional commitment though you believe you’ve fulfilled all the conditions, it will be because your handling of one of the conditions indicates you’re a bigger risk than they thought. Make sure your loan officer explains the exact meaning of every condition and how you should fulfill it. And make sure all the information you provide is accurate and doesn’t leave out relevant details.
The truth is, legal matters are never simple, and applicable laws differ from state to state. In a 1995 paper, attorney E. Richard Alhadeff made note of commitment letters’ growing complexity and “the trend towards greater specificity in the commitment letter to avoid future litigation over provisions not expressed.” Conditional commitment letters are part of the complexity that started building all those years ago.
Contents of a mortgage commitment letter
- Name of the lender, such as a mortgage company
- Name(s) of the borrower(s)
- A statement that the borrower has been conditionally approved
- The type of loan the borrower has been approved for
- The amount of the home loan, showing how much home you can afford if this is your only financing
- A list of conditions that must be met, by the borrower and the property to be purchased, to gain final approval
- The number of days the loan offer is good for — an offer expiration date, if you like
Additional loan details — such as monthly payments, how long you’ll have to make payments to get the loan paid off, and escrow-account arrangements to cover homeowners insurance and property taxes — may not appear until you get the final letter after fulfilling all this first letter’s conditions.
If you get far enough into the mortgage process, you will usually receive one of these conditional letters. While a seller’s real estate agent may start a sales transaction with only a preapproval letter, you’ll be expected to obtain a mortgage commitment letter soon thereafter. And you won’t be able to close until you’ve moved past the conditional to the final commitment.
Ideally, get one before you make your offer
As you make an offer on a home, having this mortgage commitment letter shows the seller that you’re a serious buyer and have already been approved for financing. Many sellers, particularly in hot real estate markets, won’t even waste their time taking non-cash offers from prospective buyers who lack this evidence that they can finance their purchase.
Stage 4: final mortgage commitment letter
A final mortgage commitment letter is your lender’s formal approval of the loan you’ve applied for. Unlike the conditional commitment, this final commitment lists no conditions that you and the property must satisfy to qualify for financing. If you previously received a conditional approval letter, this final letter indicates that you and the property you’re buying have met the first letter’s conditions. In light of this, your mortgage underwriter has finalized the assessment that you are a good risk and given your loan the go-ahead. Congratulations, you’ve survived the underwriting process. You’ll be asked to sign your acceptance of the offer, making this letter a contract between you and the lender.
The point bears repeating: once you’ve signed your acceptance, a mortgage commitment letter is a contract. Mortgage lenders who’ve tried to get around this have not fared well, at least not in New York. Harry C. Goberdhan, Assistant Counsel, New York State Department of Financial Services (NYS DFS), responded to a lender’s inquiry this way:
“As to your second question, assuming that the borrower has accepted the commitment and has satisfied all outstanding conditions and provided all necessary documents, can a mortgage banker reserve to itself the right to rescind the commitment by requiring that the borrower sign a document granting such right to it. Clearly, this question has to be answered in the negative. To reach a different conclusion…is neither in line with basic contract law, nor with the spirit of the Banking Laws and Regulations.
I also signed my agreement to the terms of the conditional letter, so was it also a binding contract?
Astute question! In principle, the same reasoning should apply to both conditional and final mortgage commitment letters, assuming your lender asks you to sign the conditional letter to indicate acceptance of its terms. In fact, if your lender doesn’t have you sign the conditional letter, it’s probably a preapproval, not a commitment. But prudent borrowers may prefer to treat only the actual disbursement of funds as proof of lender commitment.
That said, we’ll let you in on a little secret. The whole “conditional letter” vs. “final letter” distinction, though helpful, is artificial. Legally speaking, there are just commitment letters. Some of them specify conditions while others don’t. But they are all legally binding documents and, in fact, the same type of document. Don’t let lenders’ copywriters make you think otherwise.
Final commitment letter contents
This letter contains much of the same content as the conditional letter. It, however, commits the lender to provide your financing without your fulfilling additional conditions. Like the conditional letter, this final letter will only be good for a limited time. You will need to complete your home purchase before this time runs out.
Final commitment letter contents
- Name of the lender, such as a mortgage company
- Name(s) of the borrower(s)
- A statement that the borrower has been approved
- The type of loan the borrower has been approved for
- The amount of the home loan
- Down payment to be made
- The number of days the loan offer is good for, that is, how long you have to complete your purchase
- Loan terms, such as monthly payments and amortization schedule
- Escrow-account arrangements to cover homeowners insurance and property taxes
Does a final commitment letter mean I’m clear to close?
When lenders say you’re “clear to close,” they mean that you and your property have met all their requirements and you may conclude your purchase, assured that your mortgage arrangements are settled. That’s also what a final commitment letter means. So, provided your letter really is final, you are clear to close. Just make sure you do so before the loan offer’s expiration date.
How long does it take to close after a mortgage commitment? This varies widely by lender and loan program, so you might be best served contacting your mortgage lender with this question. Most sources answer this question by citing ranges for mortgage loans to go from loan application to closing or funding. The range estimates for this vary, with sources allowing mortgage loans to close in as little as 15 days or as many as 60. Meanwhile, a typical mortgage commitment letter takes 20–45 days. About all one can say for certain is that you should receive your mortgage commitment letter sometime before your loan closes.
A subordinate mortgage lender can commit
Mortgage commitment letters are not just for first mortgages, by the way. If you need subordinate financing to help out with your down payment, for instance, you can also get a commitment letter for that. The D.C. Housing Finance Authority (DCHFA) issues such a letter for its DC Open Doors down payment assistance program, for example. The letter’s concluding verbiage, “The undersigned Borrower(s) accepts this commitment and all the terms and conditions found herein,” is typical of these agreements.
On the subject of subordinate financing, beware of the temptation to try anything legally suspect like a silent second mortgage. In addition to learning about and avoiding actions that could put you in legal jeopardy, another good way to prepare for the mortgage process is to read SuperMoney’s comprehensive study of the mortgage industry.
Key takeaways
- Before you start looking at homes, you should get prequalified or, better, preapproved for mortgage financing.
- Regulations say lenders may not require documents verifying your financial situation before giving you a loan estimate and getting your confirmation that you wish to proceed with your mortgage application.
- In theory, this means you shouldn’t have to provide any documents for a preapproval. In practice, since lenders aren’t obligated to preapprove anyone, you’ll need to “voluntarily” provide multiple documents for a preapproval.
- Once you’re ready to make an offer or not long after making an offer, you should seek a mortgage commitment letter from your lender.
- Some sellers will only accept your offer if you have a mortgage commitment. Others will accept a preapproval to begin with.
- Most commitment letters include conditions. Once you and the property you’re buying meet these conditions, your lender will give you a final letter without conditions.
- A final mortgage commitment letter means you’re clear to close on the property.
- Whether conditional or final, mortgage commitment letters are legally binding documents. Don’t take them lightly.
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Have you found the home you want to buy? Are you ready to start filling out loan documents and putting in paperwork for loan processing? Or are you just now starting your home search? Either way, SuperMoney’s advanced filters and real-customer reviews can make finding the right home-purchase mortgage simpler and faster. Scroll down past the sharing icons to start your search.
DH
David loves learning, doing research, analyzing data, and assessing arguments. Though he has two advanced degrees and some background in psychology, and though he's learned a great deal in his work with SuperMoney, he considers himself an interpreter of experts, not an expert himself. He enjoys using what he's learned, and what he's still learning, to help readers make better saving, spending, and investing decisions.
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