The home loan process can be a complicated one. With many terms that, upon first glance, often seem interchangeable. For instance, many borrowers confuse a mortgage prequalification, preapproval and a commitment letter. While each plays an important part in your home buying journey, the mortgage commitment letter is the most significant for the borrower. And here, we answer some of the questions as to why the commitment letter matters to you.
What is a Commitment Letter?
Unlike a preapproval or prequalification, which really only tells you what your lender may be willing to loan you, the commitment letter is a more formal document indicating you’ve passed the underwriting guidelines and that your loan has been approved. Essentially, it’s an agreement between you and your lender regarding the terms of your mortgage.
What Does the Letter State?
A commitment letter specifies the type of mortgage being obtained, the amount of money being borrowed, the terms or length of the repayment period, and the mortgage interest rate agreed upon. Most mortgage commitments are conditional, which means there’s a list of conditions to be met in order for the commitment to be fulfilled. These normally pertain to the property, like hazard insurance and flood insurance. If the conditions aren’t met, the lender isn’t required to move the mortgage to closing.
When is the Letter Issued?
The commitment letter is issued after your application has been submitted along with all the required documents, such as pay stubs, bank statements, etc. After the loan file is processed and the appraisal is received, the underwriter will examine each document, make sure the debt-to-income and the loan-to-value ratios are within guidelines and, if approved for lending, will issue a commitment letter to the borrower. The length of when you’ll receive the letter varies, typically taking between 20 and 45 days.
What Should I Look For on the Letter?
All of the material terms of your loan will be in this letter, so it’s crucial you read and understand what’s in there. These are things like the type of mortgage, the length of the loan, the interest rate, the property address, etc.
At the mortgage closing, you should compare what’s on the commitment letter with the loan documents you’re signing. By doing so, you’ll be able to catch any mistakes prior to signing the closing documents. It’s easier to correct errors prior to signing the documents than after closing.
Does the Letter Expire?
A commitment letter from a lender does have an end, or expiration, date. This means that if the loan doesn’t fund within that period, the deal is off and the lender doesn’t have to lend the money under the terms that were stated. Not closing prior to the expiration date of the commitment letter can change the entire mortgage, including the interest.
Not all lenders issue commitment letters to borrowers. Some will only issue a preapproval, which isn’t as detailed and not a firm commitment from the lender.
If you’re thinking of becoming a homeowner, a ditech Home Loan Specialist can help you determine the right mortgage for your situation. Find a Home Loan Specialist now.