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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.

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

•   Mortgage loan term

•   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

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The impact of interest rates and their fluctuations are a fact of life for investors, and there are several ways interest rates can affect the stock market. For example, higher interest rates raise the cost of borrowing for consumers and corporations, which can ultimately affect public companies’ earnings, and potentially, stock prices. The reality for stock market investors is that even minor adjustments to interest rates can significantly impact their portfolios.

But the effects interest rates may have on stock prices goes much deeper than that. Here’s how rising or falling interest rates could affect stocks, stock prices, and the stock markets.

What’s the Fed Fund Rate?

While many market factors come into play to determine interest rates, the Federal Reserve, or the U.S. central bank, influences rates and sets the fed funds rate. The fed funds rate is the rate that financial institutions trade federal funds, which has a downstream effect on interest rates of all types, from mortgage rates to the effective interest rate you’ll pay on your credit card balance.

Zooming out even more to try and get more context, the Fed has a “dual mandate”:

•  Create the best environment for maximum employment.

•  Stabilize prices, or keep inflation in check.

One of the tools the Fed has in its toolkit to try to achieve these twin goals is controlling short-term interest rates — or, the Fed Funds rate. This is done by the Federal Open Market Committee (FOMC) — made up of 12 Fed officials — which meets eight times a year to set the federal funds rate, or the target interest rate.

The federal funds rate is the rate banks charge each other to lend funds overnight.

Other factors influence general interest rates, like consumers’ demand for Treasuries, mortgages, and other loans. But when the Fed adjusts the federal funds rate, it has sweeping ripple effects on the economy by broadly changing the cost of borrowing.

When Rates Go Up, What Happens to the Stock Market?

The Fed may increase interest rates in response to some macroeconomic trend, such as rising prices (or inflation). That was the case in 2022 and 2023, when the Fed increased interest rates in response to rising inflation. That’s generally a sign that the economy is a bit too hot, or growing too fast.

If the U.S. economy is growing too fast, the Fed can hike interest rates to get a grip on rising inflation – again, which is exactly what happened in 2022 and 2023 – which effectively makes goods and services more expensive. This is to make borrowing and getting credit more expensive, which curbs consumer and business spending, reduces widespread prices, and hopefully gets the economy back on an even keel.

Another example: In the early 1980s, Fed Chair Paul Volcker jacked up interest rates to above 20% in order to tame runaway inflation; prices were rising by more than 10% annually during the period. Volcker’s interest rate moves were a big reason why the average 30-year mortgage rate was above 18% in 1981.

As for how that affects the stock market? Generally, it leads to a decline, though not always. Since costs go up after a rate hike, earnings can fall, and investor sentiment can take a hit, too.

When Rates Go Down, What Happens to the Stock Market?

Conversely, when rates go down, the market may rally, as the Fed is signaling that it wants to give the economy a shot in the arm. That means borrowing costs could decline, more people could potentially be spending money, and businesses could drive more revenue and profits. Those are all things investors want to see and hear, so they may increase demand for stocks, lifting the market overall.

Again, the Fed might do this if it thinks the economy is too slow or contracting, and wants to boost activity. This move, known as loose monetary policy, is one way the Fed attempts to hit the mandate of creating the best environment for maximum employment.

In short: Lower interest rates make it easier for consumers, businesses, and other economic participants to borrow money and get easier access to credit. When credit flows, Americans are more likely to spend money, create more jobs, and more money enters the financial markets.

Recent history bears this strategy out. In 2008, when the global economy cratered, and both employment and spending were in free fall, the Fed slashed rates to near zero percent to make credit easier to get and restore confidence among consumers and businesses that the economy would stabilize. The Fed again cut interest rates in March 2020 to near zero percent to stimulate the economy during the initial waves of shutdowns due to the coronavirus pandemic.

Do Rate Changes Impact the Bond Market?

Generally, higher interest rates tend to be a headwind for stocks, partly because investors will prefer to invest in lower-risk assets like bonds that may offer an attractive yield in a high-interest rate environment.

But lower rates may make the stock market more attractive to investors looking to maximize growth. Because investors cannot get an attractive yield from lower-risk bonds in a low rate environment, they will put money into higher-risk assets like growth stocks to seek an ideal return. So, there tends to be an inverse relationship between stocks and bonds depending on the prevailing interest rate environment.

Recommended: Bonds vs. Stocks: Understanding the Difference

Other Areas Affected by Rate Changes

While the stock market may be affected by rate changes, so are consumers and businesses.

Consumers

In a period of high interest rates, publicly traded companies face a potential indirect threat to revenues, which could hurt stock prices.

That’s due to the reduced levels of disposable income in a high-rate environment. Higher rates make it more expensive for consumers to borrow money with credit cards, mortgages, or personal or small-business loans.

Consumers’ tighter grip on their pocketbooks may negatively affect companies, who find it more challenging to sell their products and services. With lower revenues, companies can’t reinvest in the company and may experience reduced earnings.

Companies

Businesses that are publicly traded can experience significant volatility depending on interest rate fluctuations. For instance, changes in interest rates can impact companies through bank loan availability.

When rates rise, companies may find it more difficult to borrow money, as higher interest rates make bank loans more expensive. As companies require capital to keep the lights on and products rolling, higher rates may slow capital borrowing, which can negatively impact productivity, cut revenues, and curb stock growth.

Correspondingly, companies can borrow money more freely in a lower interest rate environment, which puts them in a better position to raise capital, improve company profitability, and attract investors to buy their stock.

Protecting Your Investments From Higher Rates

There are strategies you can use to protect your portfolio when interest rates change.

•   Monitor the Federal Reserve and its rates policy. The FOMC meets eight times a year to discuss economic policy strategy. Even if they don’t result in an interest rate change, announcements from the meetings can significantly impact the stock market.

•   Diversify your portfolio. Investors can try to diversify their portfolio up front. A portfolio with a mix of investments like stocks, bonds, real estate, commodities, and cash, for example, may be less sensitive to interest rate moves, thus minimizing the impact of any volatile interest rate fluctuations.

•   Look into TIPS. Investing in Treasury Inflation Protected Securities (TIPS) may help fortify a portfolio against interest rate swings. TIPS are a form of Treasury bonds that are indexed to inflation. As inflation rises, TIPS tend to rise. When deflation is in play, TIPS are more likely to decrease.

The Takeaway

Changes in interest rates can have far-reaching effects on the stock market. In general, higher interest rates tend to have a dampening impact on stocks, while lower interest rates tend to boost market prices. Higher interest rates effectively mean higher borrowing costs that can slow down the economy and companies’ balance sheets and drag down stock prices. Additionally, higher interest rates can boost the appeal of bonds relative to equities, which also acts as a drag on stocks.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

How do rate changes affect stock prices?

Rate changes can and do affect stock prices. Typically, when rates rise, the market falls, and conversely, when rates fall, the market rises.

What sectors are impacted the most when rates change?

The financial services industry is one of the most heavily impacted industries when it comes to rate changes, but so are several others, including retail and manufacturing.

How do interest rates affect inflation?

Higher interest rates may serve to lower inflation by reducing overall demand in the economy. Higher rates means higher prices, and fewer people will make purchases accordingly, which should have a downstream effect of lowering prices in response to lower demand.