What is a Mortgage Commitment Letter & What Does it Mean?

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A loan or mortgage commitment letter is a formal document issued by a lender that promises to provide you with a specific mortgage amount under stated terms.

This letter is a step beyond a preapproval letter. It provides a higher level of certainty that the loan will be granted, which can be reassuring to both the borrower and the seller.

Today, we’ll review what mortgage commitment letters mean, what’s in them, and how to get one.

Is a Mortgage Commitment Letter Legally Binding?

A mortgage commitment letter is legally binding. However, it does not automatically mean you are guaranteed to close.

This is because mortgage commitment letters have expiration dates, and many commitment letters also include conditions that must be met before you can close.

If you meet the conditions before expiration, you are legally entitled to the loan terms outlined in the letter. If you don’t close the loan within that period, the offer expires, and the lender may charge you for the cancellation. Once your commitment letter expires, you need to re-apply for the loan. Your new loan offer (including the interest rate) will likely differ from the old one.

What’s in a Mortgage Commitment Letter?

A mortgage commitment letter typically includes the following information:

  • Loan Amount: The amount of money the lender agrees to loan the borrower.
  • Loan Type: Whether the loan will have a fixed or adjustable rate, and the type of mortgage loan.
  • Loan Terms: The interest rate and length of the loan.
  • Expiration Date: Most commitment letters include a date the loan must be closed by, or the offer will expire.
  • Conditions: Requirements that must be met before the loan can be finalized. A final commitment letter will not include any conditions.

How Long is a Mortgage Commitment Letter Good For?

A commitment letter expiration date (known as a rate lock) will vary by lender but is good for 30 to 90 days on average.

Commitment Letter vs. Conditional Approval

Conditional approval is a term that describes the point in the mortgage application process

when a lender has reviewed your application and has determined that you meet the basic criteria to qualify for a loan, such as creditworthiness, income, and the ability to provide a down payment.

A mortgage commitment letter is a document that locks in your mortgage terms – given you meet any conditions outlined by your lender. Mortgage commitment letters are referred to as firm/final or conditional. When a commitment letter is “conditional,” it means there are tasks for you to complete before you can close. This may include providing additional documentation and proof of income. If your mortgage commitment letter is “firm” or “final,” there won’t be any conditions listed in the letter.

Commitment Letter vs. Clear to Close

“Clear to close” is different from receiving a commitment letter. Clear to close is a term underwriters use to signal that you have been approved for closing and there are no more tasks to complete before closing day.

In contrast, a mortgage commitment letter is typically conditional and signifies additional steps that must be completed before you are ready to close. However, it is possible to receive a final commitment letter in conjunction with a “clear to close” signal.

How Long Does it Take to Get a Mortgage Commitment Letter?

Your mortgage commitment letter will come near the end of your homebuying journey, following the underwriting process.

Once you have an accepted purchase offer on a specific property and signed a sales contract, your mortgage file moves to the underwriting stage. Underwriting is a detailed and comprehensive review of your financial documents, the property’s appraisal, and other relevant information.

The underwriter evaluates your loan application to ensure it meets the lender’s guidelines and assesses the risk associated with lending to you. They may request additional documentation or clarification during this process. This is when you may receive a conditional commitment letter, and once you satisfy all of the criteria, your commitment letter will be final.

How to Handle Your Loan Commitment Letter

First, review your commitment letter and decide if you have a firm or conditional commitment. If it’s firm, you can focus on other aspects of your transaction and prepare to close on your loan. If it’s conditional, request a list of conditions and do what you can to fulfill them if they are not clearly outlined in the letter.

Some conditional tasks–like a home appraisal being subject for review by underwriters–are more troublesome than others. This means that the lender can override the appraised value. If you see this condition, open the discussion with your lender immediately. You’ll want to know how and why this override would be enforced.

David Mully

David Mully is president and CEO of Lender Insider, a mortgage consulting firm. With 26 years in the mortgage industry, he has worked as both a mortgage loan officer and in the business-to-business sector of the industry. He is the former author of the weekly “Mortgage Search” column for Observer and Eccentric Newspapers. You can read his blog at http://www.lenderinsider.com/blog.

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