Oh. We hear you if you saw the word "commitment" and either turned away or…
Whatever your got-to home buying strategy is—a cash buyer or home loan diva—we’ve put together a little boot camp house buying list for what comes after you say “Yes” to your dream home.
What is a mortgage commitment letter?
A mortgage commitment letter is a formal document from a mortgage lender stating that you’re approved for the loan. Lenders issue a mortgage commitment letter after an applicant successfully completes the preapproval process.
How can you be more convincing to a seller?
We know you’re a wordsmith and can persuade. But aside from convincing a seller to choose your offer over others, you have the upcoming project of going through the underwriting process and producing the required documents for a mortgage application.
If you absolutely fall in love with a home in a competitive market, you’ll want to be the most convincing buyer.
What happens after mortgage commitment letter?
There’s so much paperwork. Trust us, we’ve been there, and once you get your new house keys—it’s all worth it—but until then, it can be overwhelming.
During the mortgage application process, you might have heard about the mortgage commitment letter or a loan commitment letter. It’s a document that shows you’ll have the borrowed money in the bank before closing day.
What’s in mortgage commitment letters?
A mortgage commitment letter contains the approved loan amount, interest rate, and loan terms from the mortgage lender, and you must obtain one if you’re getting a home loan.
The letter is like a promise. The lender will fund your home purchase as long as you can fulfill additional requirements.
Sometimes, the lender needs to verify your credit score, monthly income, and savings account to finish the underwriting review. 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.
Is pre-approval optional?
You might get a pre-approval if you told a lender about your credit score and income over coffee. A pre-approval is optional, and you get it at the beginning of your house hunting journey.
When do you get a pre-approval letter?
It’s the first time you’re meeting the loan officer, and you’ll give them your income information and bank statements.
They’ll verify these facts and quote how much they’re willing to lend you. But unfortunately, the lender or loan officer will not know the house you want to buy, just the loan amount and how that affects your budget.
After receiving a pre-approval letter, you can start searching for a property you can purchase based on the budget determined by the lender.
Is the mortgage commitment letter optional?
Most sellers require mortgage commitment letters, and it comes after the appraisal for the actual home value (so it’s not optional).
Likewise, the lender can write a mortgage commitment letter (or a loan commitment letter) after you share the home you intend to buy, which verifies you’ll have the funds before closing.
When should you get a mortgage commitment letter?
It would help if you got a commitment in writing from a lender or broker after the purchase agreement and before closing, which can be within 40 to 60-days.
When do mortgage commitment letters expire?
A mortgage commitment letter expires within about 30 days. If you need more time, you’ll have to get an extension if you haven’t found your dream home.
It’s best to beat this deadline to avoid disappointing the seller and getting the home you had your eye on for a while.
How do you get a mortgage commitment letter?
When you request a mortgage commitment letter, you’re applying for a home loan. Mortgage lenders might want you to meet more requirements depending on your situation, but typically you’ll need the following:
- Pay stubs from the last two months
- W-2 forms or tax returns for the previous two years
- Your most recent bank statements of your savings and checking accounts
- Your most recent credit statements for all your credit cards and existing loans
- Any retirement accounts
- Existing investment accounts
The mortgage lender will get your credit history report from the three main credit bureaus: Equifax, Experian, and TransUnion. From there, a lender will calculate your median credit score.
It’s not your average score, but instead, they disregard your top and lowest scores and use your middle score for the application.
What to do before you apply for a mortgage commitment letter
It would help if you prepared in advance, like your credit card statements and investment accounts. It’s good to know your credit report before a lender. Then the mortgage application will be easy.
This is how to get your mortgage commitment letter in under 30-days:
1 – Submit updated bank statements
A lender will need to see your most up-to-date copy of your savings and checking accounts. Be honest. The lender has no idea if you’ve already withdrawn all the money. Therefore, you must maintain whatever amount you declare during the approval process.
A good lender can determine whether you can pay for at least the down payment and the closing costs from a simple glance.
2 – Secure a homeowners insurance
It would help if you had a homeowners insurance policy on the closing date, or you might lose the home.
Unlike PMI, the homeowner’s policy protects you and the lender. Your policy will help you cover home damages or property loss and ensures that when you sell the property, the lender can expect its in good to excellent condition.
Why have all the required documents?
A mortgage lender will want to safeguard the value of the home. An insurance binder is one-page temporary insurance you’ll get after meeting with an insurance agent or answering a questionnaire.
You need one during closing costs, or you could lose your home (if you couldn’t get the homeowners insurance policy in time). Usually, you don’t need a home inspection and can get an insurance binder within a day.
3 – Prepare a down payment gift letter
You might need a gift letter if you’re getting a Federal Housing Administration (FHA) loan because your credit score is 500 or below.
An FHA loan is a government-insured mortgage and is the only type of mortgage that allows the use of gifted funds from family or friends to make a down payment, provided that they sign a gift letter as a promise that they won’t ask you for repayment. If not, it’s considered a personal loan and can put the government on red alert.
4 – Provide any missing documents
When the underwriting process is finalized, you might have missing documentation—like an investment account you forgot you even had or a few missing pages on your bank statement. The underwriter will need these asap to complete the loan terms.
Your credit report can have red flags
If you have some negative marks on your credit report, the lender might want to clarify them by asking you to submit additional proof.
For example, if you had issues paying off another loan, even a long time ago, they’ll want to know if you can meet your obligations with the previous lender to determine if you can meet their current requirements. Then you’ll need to submit proof that you don’t owe money to any other lender.
How does this help you?
A boss credit score (anything above 720) gives you more options. And the more home loan options mean a cheaper mortgage.
A conventional mortgage takes at least a 620 credit score and a minimum 20% down payment. Then you won’t have to pay for Private Mortgage Insurance (PMI), which can be around 0.5 to 1% of your total mortgage loan amount.
According to Bankrate, Freddie Mac says this is about $30 to $70 included in your monthly mortgage payments depending on the purchase amount and down payment, but it’ll likely be an annual payment.
Why is it important?
A cash offer inherently has an edge. But if you don’t have cash and want the same “edginess” in a booming housing market, then a mortgage commitment letter is the right way to go.
During the pandemic, buyers might have paid around 50 to 100 thousand dollars over the asking price just to be chosen by a house seller. Although housing prices are still high, sellers may select buyers based on a commitment letter alone to prove they have the funds to pay for a house on time.
What do sellers want?
Most sellers want the best offer. That could mean a cash buyer or a better proposal for the purchase price.
During negotiation, a pre-approval letter can get you by. But a serious buyer will have a mortgage commitment letter to impress the seller and real estate agent. It also makes the final approval process a breeze.
Although the commitment letter does not mean final approval, you have found a mortgage lender willing to work with you, and they need more time to verify all the facts before releasing the funds for your purchase.
What happens after the mortgage commitment letter is issued?
After the home’s appraisal, you can get a commitment letter. Appraisals are separate from the home inspection. An appraised value is required through a lender, while a home inspection done by a home inspector is not.
Mortgage lenders do not always mention that you can get a home inspection. But you might want to look into it because it could save you thousands of dollars.
For example, an inspection might uncover a foundation crack or a termite-infested roof.
So, if you decide to pay for an inspection (it’s highly recommended), make sure you get the house inspected before you get a mortgage commitment letter.
How to get full approval
There’s still a slim chance you won’t get a mortgage, and you won’t get the house even after a commitment letter.
So, here are a few essential things to watch out for:
1 – Continue meeting your other obligations
During this time, your mortgage lender is still conducting a background check. You want to convince them that you are worthy of getting the loan and you’re a responsible borrower.
To prove that, you can continue paying for bills in full and make the minimum loan or credit card payments on time.
2 – Don’t randomly apply for other loans
A mortgage company evaluates the risk they’ll acquire by lending you money. So, you might want to hold off on applying for other loans or credit cards during this brief period.
Every time you apply, it shows up with the credit bureaus. As a result, your credit score can take a hit, whether you get approved or denied.
For example, even a simple visit to an auto dealer can shave a few points off your credit score if you’re not careful. A salesperson can run a credit check without your knowledge to see if you are eligible for an auto loan.
So take it easy and keep your phone and email near to be ready for anything during the home buying journey.
3 – Take note of any red flags
Aside from being the best borrower, you can be, you’ll also want to be wary of unfavorable terms. The mortgage commitment letter is your expectations of what the mortgage lender can promise you and the loan terms you will accept.
Before closing day, you can consult your real estate attorney or do your research to know that you are getting the best deal. Then you can add new decor to your inspiration Pinterest board that’ll come in handy when you get your dream home.