What Is A Mortgage Commitment Letter And How Can I Get One?

When you’re buying a new home, you’ll want to have a good idea of how much financing you can get. After you’ve figured out your budget and found the home of your dreams, you’ll want to be seen as a serious buyer. To achieve these goals and reach success in your home buying journey, a mortgage commitment letter can be an invaluable tool.

Let’s discuss what a mortgage commitment letter is, the different types you can receive and why you should get one before putting in an offer.

A mortgage commitment letter is a formal document from your lender stating that you’re approved for the loan. Lenders issue a mortgage commitment letter after an applicant successfully completes the preapproval process. The letter tells the applicant how large of a mortgage the lender will likely approve, and the applicant can use the letter to show real estate agents and home sellers that they’re creditworthy and a serious home buyer.

In fact, most sellers won’t consider an offer (other than cash) from a buyer who is not preapproved. That’s why it’s essential you submit a loan application and partially complete the underwriting process to receive a final commitment letter (called a Verified Approval Letter if you apply to Rocket Mortgage®) early in the process, so you’ll be well prepared once you find your dream home.

There are two types of commitments: conditional and final.

A conditional commitment letter approves the borrower for a certain loan amount, as long as certain conditions are met. This type of commitment letter may contain the following pieces of information:

• Lender’s name
• Borrower’s name
• Statement of preapproval
• Type of loan
• Loan amount
• List of conditions that must be met before final approval
• Amount of days preapproval is valid

A final mortgage commitment is when the conditions have been met and the lender promises to lend you the specified amount. This letter typically contains the following information:

• Lender’s name
• Borrower’s name
• Property address if an offer has already been made
• Statement of approval for loan
• Type of loan
• Loan amount
• Loan term
• Interest rate
• Date of commitment
• Rate lock expiration date
• Commitment expiration date

To get a mortgage commitment letter, you’ll need to go through the application process to get prequalified and then initially approved. This process may require you to provide documentation, like bank statements and pay stubs, to show you have a steady income and enough money to uphold the financial responsibilities of the loan.

The lender will also review your credit score and credit history to get a better idea of your financial situation, plus the amount of debt you have and how you handle it. This information helps the lender determine how much more debt you’re able to take on.

Getting your commitment letter can be a huge first step in the home buying process.

After you’re preapproved, you’ll receive a conditional mortgage commitment letter. That does not mean you’re approved for the loan. With this conditional approval, you’ll still have steps to take in the mortgage application process.

Lender Conditions Vary

A conditional approval means that certain conditions must be met before the lender can approve your mortgage. Conditions will vary by lender and state law, but a few common conditions you can expect include:

• Purchase agreement
• Submittal of all necessary documents
• Satisfactory home appraisal
• Proof of homeowners insurance
• Ability to pay closing costs and down payment
• Proof of title
• Final underwriting approval

Another important condition is that your financial status and credit report remain essentially the same, with no major changes, until the home loan closes.

Lenders Will Require An Appraisal Of Your Home

Your credit and income are only half of the equation. A satisfactory home appraisal is another major part of getting final approval for your loan. Your lender will not lend more than the appraised value of the home. This can help you avoid paying more for your home than it's worth and the possibility of a mortgage default.

For example, you may be approved for a $150,000 loan originally. However, if the home you wish to purchase is appraised at $135,000, the lender will only approve a loan for up to $135,000. In this case, you’d have to negotiate with sellers to lower the purchase price or bring more money to the table on closing day.

As long as nothing changes financially with the applicant during the house hunting phase and the home’s appraisal value covers the loan amount, the loan commitment generally stands. However, the lender reserves the right to reduce the loan amount or deny the application.

Having the letter indicates to real estate agents and home sellers that you’re a serious buyer. It also shows that you can afford the home and have already started the mortgage process. It can further assure the seller that there could be fewer hiccups down the road. Because of these reasons, this letter can be especially helpful in a seller’s market, when competition among buyers is particularly high.

You may wonder about other aspects of a mortgage commitment letter. Here are the answers to a few of the common questions regarding this important step in the process.

If the lender agrees to lend a certain amount, does that mean I can afford to spend that amount on a house?

It’s important to remember that your approval amount should not be confused with how much house you can actually afford. Remember that, when determining how much to loan, lenders don’t look at your monthly budget, which includes other expenses, like utilities, groceries, cell phone bills, car insurance and self-care costs. While the lender may think you have room in your budget for a $1,500 mortgage payment, your realistic budget may only allow for a $1,000 monthly payment when all other expenses are also considered.

There are also costs that go beyond the mortgage payment itself. When you purchase the home, you may be required to make a down payment of at least 3% of the purchase price, along with closing costs that can be up to 6% of the purchase price.

Once you move in, there will be additional costs to consider when owning a home, including home maintenance, homeowners insurance and property taxes. It’s imperative to think about your homeownership budget along with your home buying budget.

To help you set your budgets, it can be helpful to consult the Rocket Mortgage Home Affordability Calculator and consider whether you want to buy a starter home or a forever home.

What if I don’t want the seller to know how much I’ve been preapproved for?

During the offer phase of the home buying process, lenders can tailor the letter to the amount you’re willing to offer on the home. When requesting this, consider whether you’re in a competitive market and leave room for negotiations.

What happens if the rate lock or commitment expires?

If your interest rate lock expires before you close on the loan, there may be a price adjustment on the loan. If the commitment expires before you can close, you may need to resubmit documents and go through another credit approval to get a new mortgage commitment. This could result in a delay in the process and may change your loan terms, like how much you pay each month or how much you qualify for.

What happens after receiving your mortgage commitment letter?

Once your mortgage commitment letter has been submitted, you’ve entered the final stage of the mortgage process. The letter is not a final approval, but more so a pledge to the borrower that the mortgage lender will grant the loan if all conditions are met. If there are no loose ends, you should be approved.

Once you’re approved and getting ready to set a move-in date, you’ll need to go through the settlement process of the purchase transaction and mortgage loan. It’s important to note that just because your mortgage company created the commitment letter, doesn’t mean you shouldn’t be able to still back out. Nothing is final for the borrower until the loan is funded and all the closing documents are signed.

A mortgage commitment letter can help you set a home buying budget and gives you a leg up on the competition when putting in an offer on a home by showing you’re a serious buyer. To make sure you’re fully prepared to submit an offer or win a bidding war, you should consider starting the initial approval process.

Fill out an application today to learn more about what rates and terms you can qualify for with Rocket Mortgage.