May 13, 2020
The home loan process can be a complicated one, full of terms that 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 more significant for the borrower.
What is a Commitment Letter?
Unlike a preapproval or prequalification, which really only tells you what a lender like NewRez 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 (us!) 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 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 lenders are not required to move the mortgage to closing.
When is the Letter Issued?
The commitment letter is issued after you submit your application with all the required documents, such as pay stubs, bank statements, etc. Once the loan file is processed and the appraisal is received, the underwriter will examine each document, and make sure the debt-to-income (DTI) and the loan-to-value (LTV) ratios are within guidelines. If approved for lending, they will issue a commitment letter to the borrower. Exactly when you’ll receive the letter varies, but it typically takes between 20 and 45 days.
What Should I Look for in 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, and the property address.
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 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.
If you’re thinking of becoming a homeowner get started by checking out our articles and mortgage calculators for all the mortgage basics. Then, get in touch with one of our mortgage consultants to begin your home buying journey.