A mortgage commitment letter is a step beyond prequalification and preapproval and could give a homebuyer an edge in a competitive market. It lays out the loan details and indicates that a buyer has an agreement for a mortgage.
But who should obtain a mortgage commitment letter and when? Let’s take a look at those answers and more.
What Is a Mortgage Commitment Letter?
A mortgage commitment letter — conditional or final — is a step closer to finalizing a mortgage but short of “cleared to close.” The letter signals to the seller that the buyer and a chosen financial institution have forged an agreement.
Buyers may seek a conditional mortgage commitment letter when they’re house hunting, and a final commitment letter when they’re ready to make an offer on a specific home.
In both types of loan commitments, the lender outlines the terms of the mortgage.
Recommended: Buying in a Seller’s Market With a Low Down Payment
Types of Mortgage Loan Approvals
In the mortgage loan process, buyers will hear “approval” thrown around a lot. But not all approvals are built equally, and each type signifies a different part of the process.
Prequalification
Getting prequalified is often an early step for buyers in the home search. It’s quick, can be done online, and doesn’t require a hard credit inquiry.
To get prequalified, buyers provide financial details, including income, debt, and assets, but no documentation, so this step serves as an estimate of how much home they can afford.
Prequalification can help buyers create a realistic budget, but the amount, interest rate, and loan program might change as the lender gets more information.
Preapproval
Preapproval is slightly more complicated, requiring a hard credit inquiry and documentation from the buyer. Lenders may ask for the following:
• Identification
• Recent pay stubs
• W-2 statements
• Tax returns
• Activity from checking, savings, and investment accounts
• Residential history
Armed with this information, a lender will give buyers a specific amount they’ll likely qualify for.
Preapproval also shows sellers that a buyer is serious about a home, as it means a lender is willing to approve them for a mortgage.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Conditional vs Final Commitment
Prequalification and preapproval can be important steps during the home search. But especially in a seller’s market and in certain cities, the mortgage commitment letter can become an important tool.
While a mortgage loan commitment letter can show a seller that the buyer is serious, not all letters are the same.
A conditional mortgage approval letter, the most common type, means that the lender will approve buyers as long as they meet certain conditions.
Conditions could include:
• No change to the buyer’s finances before the closing date
• Proof of funds to cover the down payment and closing costs
• Passing of a home inspection
• An appraisal
• Proof of homeowners insurance
• No liens or other problems with the property title
A final commitment letter means the lender has unconditionally approved the buyer for a loan to purchase a home. However, this doesn’t mean the buyer is guaranteed a loan; it just means the lender is ready to approve the mortgage.
Having a mortgage commitment letter in hand is a good way to ensure that nothing will go wrong during underwriting.
Recommended: See Local Housing Market Trends by City
How to Know If You Need a Mortgage Commitment Letter
Buyers don’t need to provide a mortgage commitment letter to a seller. Still, that extra step beyond preapproval indicates how serious they are about a property.
Since it may require a little extra work, it shows sellers that a buyer is less likely to back out, especially due to financing issues.
A mortgage commitment letter could convince a seller to take a buyer more seriously in a seller’s market. And it could calm the nerves of buyers who face home-buying angst, including the challenge of covering a down payment and closing costs (even if they plan to roll closing costs into the loan).
How to Get a Mortgage Commitment Letter
Getting a mortgage commitment letter might sound like a hassle during an already stressful home-buying process, but doing so could save buyers time and provide a sense of relief as they creep closer to closing.
First off, buyers will need to be preapproved. If they have chosen a home, once under contract, their lender or underwriter will want more information, which may include:
• A gift letter if another party is helping with the down payment
• Employment verification
• Explanation of any late payments
• Proof of debts paid and settled
From there, it could be a back-and-forth between the lender and buyer, with the lender asking for clarification or additional documentation. Common issues that arise include:
• Tax returns with errors or inconsistencies
• Unexplained deposits into buyer bank accounts
• Multiple late payments or collections on a credit report
• Unclear pay stubs
At this point, the lender may grant a conditional commitment letter, with the caveat of additional information and an appraisal. If the buyer has an appraisal and meets lender expectations with documentation, they’re likely to get a final commitment.
Contents of a Commitment Letter
A commitment letter will vary from lender to lender but generally include the following details:
• Loan amount
• Loan number
• What the loan is for
• Type of loan
• Lender information
• Expiration date of the commitment letter
What happens after the commitment letter? The lender and underwriter will continue to iron out the mortgage details, aiming for cleared-to-close status before the closing date on the property.
The Takeaway
A mortgage commitment letter is like a short engagement before the wedding: It signals an agreement before the real deal. Buyers in an active seller’s market might find a mortgage commitment letter advantageous.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
How long does it take to get a mortgage commitment letter?
It typically takes 20 to 45 days to get a mortgage commitment letter. The average closing process takes 50 days.
Does a mortgage commitment letter expire?
Yes.
How long is a mortgage commitment letter valid?
Timing can vary by lender, but the length of commitment is typically 30 days.
Photo credit: iStock/MartinPrescott
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SOHL-Q224-1917095-V1