Whatever your got-to home buying strategy is—a cash buyer or home loan diva—we've put together…
Oh. We hear you if you saw the word “commitment” and either turned away or dug in. Sometimes, you’ll need to be all-in in the home buying journey, and other times, you can pass.
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What are the mortgage basics?
Applying for a home loan and understanding loans terms is daunting. You either need the required cash on hand or superior financial health to survive (both are best).
A mortgage broker—sometimes considered the boss of the lending industry since they have access to multiple lenders, home loans, and any loan type you can think of—can help. But you might want to do it yourself, especially if you need every cent for a down payment.
So we wanted to share the differences between a pre-approval letter and a mortgage commitment letter to get you to closing day faster.
1-What’s a pre-approval letter
Your Pinterest house hunting board has beautiful homes waiting for a walk-through. But which homes can you afford? That all depends on your down payment because it can affect your pre-approval letter.
What’s the difference between preapproval and prequalification?
A pre-approval is how much money a lender is willing to let you borrow. On the other hand, a prequalification is a conversation with a mortgage lender (not an approval).
Neither one is an assurance you’ll get a verified home loan, but each requires accurate information.
Should you pay cash vs. getting a home loan?
If your savings account can get you about ten Lamberginis, you might be able to skip a mortgage loan. However, if you need extra help getting your dream home, you might work with a lender.
What happens after your personal finance runs out?
Imagine seeing an outfit you have to have, but it’s so expensive that your rent might be late. Similarly, if you spend all your personal finances before a down payment, getting a low-rate loan commitment is more difficult.
What kind of conditional commitment letters can you get?
You might meet with a lender or broker and tell them, casually, how much money you have in the bank, your credit score, and how much you make. Then, if the lender is good at their job, they can tell you whether you’ll get approved or not.
A prequalification is a conversation and has nothing to do with the final approval of a loan application or a loan commitment date or letter. It does not guarantee anything. It’s conditional on requirements that you must meet.
If you want more secure funds, or if the lender promises you a specified amount, you must commit.
Pre-approval with loan terms
Commitment can come in many forms, but once you submit loan amount documentation, you’re well on your way to pre-approval in the homebuying process.
These are some of the documents you’ll need to show commitment for pre-approval if shopping for home loans:
- Your accurate credit score
- Credit history
- A complete credit report
- Recent bank statements (less than thirty days old)
- Current pay stubs (at least two)
- Credit card statements (with pending purchases and limits)
- Saving account amounts
- Tax returns (the last two years)
Your credit report will come from the top three credit bureaus: Equifax, Experian, and TransUnion.
Then, the loan officer will review the provided loan documents, which go towards your loan application, and tell you the loan amount. At that point, they can issue you a letter if everything checks out.
Where can I get a free credit report before a prequalification letter?
On the HLP app, we show FICO® Scores based on Experian data, so everyone can get a free credit report and see ways to improve it through credit counseling.
What’s the expiration date for a letter?
It’s valid for 60 to 90 days.
Be careful asking for a letter after the 90-day expiration. The lender will make a “hard inquiry” on your credit score, and it can shave off a few points from your credit score. So it’s best to get the purchase agreement before the letter expires.
Do you need to get pre-approved?
The short answer is no. However, it might be a while before you get assured of a mortgage (or something other than a conditional mortgage commitment letter). A pre-approval impresses the seller. It shows you have the confidence of a mortgage company and a lender.
When should I use a letter?
Anytime is a good time to show commitment. But the letter can be a bargaining chip, especially in a competitive market.
Cash is king with sellers. So if you can’t pay in cash, sellers will consider your offer if accompanied by a mortgage letter.
Here’s how to get pre-approved fast:
- Get a government-issued identification (passport, driver’s license, or another form of government-issued document)
- Find your W-2
- Collect your tax returns for the past two years
- Have at least two pay stubs
- Get your most recent bank statements
- Collect your most recent credit card statements
- Find your proof of assets
- Show proof of satisfied leins
After a lender reviews your documentation and does the underwriting process, you can get pre-approved. But it does not guarantee a loan.
Instead, it’s how much the lender can let you borrow—not how much they will lend to you.
There’s a slim possibility of getting rejected once you get to the mortgage application. It’s a conditional commitment because if you provide the most up-to-date documents and are honest, you should have no problem getting full approval.
2-What is a mortgage commitment letter?
If you’ve gone to college, you might have sent in a Letter of Recommendation that vouches for your academic career.
Likewise, the lender can write a mortgage commitment letter (or a loan commitment letter) after giving them more information about your intended purchase.
Why use a mortgage commitment letter?
It shows you’re serious about doing an appraisal. A property appraisal is a report that verifies the existing home’s value based on comparable sales and homes in the area (this does not include or affect property taxes).
After a home appraisal, the mortgage company can give you a mortgage commitment letter. It proves the amount a lender will lend you before closing.
Why is a mortgage commitment letter important?
A garentee is a garentee. A mortgage commitment letter is telling the seller you’ve secured the funds. If there are multiple buyers or some cash buyers, that loan commitment letter is gold.
Like how homeowners insurance guarantees a policy at closing, a mortgage commitment letter assures the seller that a loan is just signatures away. And a mortgage commitment is showing even the real estate agents you mean business.
You can make an offer as soon as you get the loan commitment letter.
It’s rare to get rejected for a home loan after the mortgage commitment letter because the money is basically in the bank. However, if someone gets denied a loan, it’s most likely because they didn’t meet certain conditions.
For example, if a buyer doesn’t stay below their credit card limits during escrow, a lender might deny them a loan.
How do you get a mortgage commitment letter?
First, you must get an appraisal of the house. Then, typically, the letter is sent to you, and you’re ready to negotiate and agree upon a purchase price.
A mortgage broker can take care of all the loan commitment documents, loan commitment date, loan terms, loan type, and loan to value processing.
So in between the purchase agreement and the closing date, you’ll need to sign all the necessary paperwork. Then on your closing day, you can get the keys to your new home!
What is a commitment letter’s expiration date?
A commitment letter expires 30 days after the underwriting guidelines are met. However, you might find the loan amount, the interest rate, and the repayment period in the letter.
But it can also list certain conditions, like if you need to raise your credit score for a better interest rate.
What is a mortgage loan commitment letter confirming?
Imagine you get a big check and deposit it into your bank account. But unfortunately, that money is not readily available until the bank clears it.
Likewise, commitment letters verify the funds will be available by the closing date.
What else do you need for a commitment letter?
There might be further documentation you need to submit. For instance, you might need older savings accounts with your full name and the total amount shown to get full approval.
What’s the main difference between pre-approval and a mortgage commitment letter?
A loan commitment letter is a binding sales contract, while a pre-approval letter is a lender’s voucher for borrowed funds.
Do you need both letters?
It’s best if you have both, but it’s not necessary.
A pre-approval letter is just as handy at the negotiating table. But if the seller has many interested buyers, a mortgage loan commitment letter can get you to the front of the line faster.
You will most likely need a loan commitment letter after a home appraisal. It shows the seller you’re a serious buyer and can back up your offer with borrowed money.
Can you do this on your own?
Of course. You can do anything on your own. But if you are flying solo, you might be very stressed out the last week before closing. In addition, you’ll have many supporting documents to sign (electronic and notarized if not in person) and a lot of cash to get to the seller.
So it’s best to get help from a lender or broker early.
Both mortgage commitment and pre-approval are great to have and can make the final days before walking through the threshold of your dream home a breeze. So get your notes asap, and you’ll be much happier with your home buying journey.