The first thing you typically do after making the decision to buy a home is get preapproved for a mortgage loan. Once you are approved, the lender gives you a "commitment letter," which spells out the financing terms. But some lenders take more time than others to verify income, check credit histories and complete other steps in the application process. Commitment letters also very often require that other terms be met related to the condition of the property you want to buy. Lenders vary and some transactions take longer than others, but it could take several weeks to get a mortgage commitment letter.
Mortgage Commitment Letter
Once you are approved for a loan, the lender will provide you with a letter of commitment stating the loan amount, the loan terms, interest rate, the property address of the house and the expiration date of the commitment letter. A commitment letter also is referred to as a "conditional loan approval." It is a document that essentially says that when all the conditions outlined in the letter are met, the loan documents will be sent out to the escrow agent who will then call you to schedule a closing date.
A mortgage commitment letter is not an open-ended agreement. Lenders often set an expiration date on the commitment letter, usually about 60 days from the date it is issued. If the buyers do not meet the conditions of the letter and do not close on the loan before the expiration date, the lender requires them to go back to square one of the loan qualification process. This is done to make sure there hasn't been a substantial change in the borrower's financial status in terms of their credit rating or employment. If there has been no change in status, getting a new commitment letter is usually as simple as updating a bank statement or pay stub.
The closing will not occur until all the conditions are met in the letter of commitment. Some common conditions include the borrower getting homeowners insurance on the property, certain repairs being made to the property that the lender requires and the title search. Sometimes a parent or relative may be providing gift funds to a borrower to help purchase the house. Some conditions would require that the gift funds and a gift letter be provided to the closing department and signed off by the underwriter.
The lender is not legally obligated to provide a loan just because it gives the borrower a letter of commitment. All kinds of things could change from the time the lender issues the commitment letter to the time of closing. The buyers could lose their jobs, spend their down payment. The house they were going to buy could even burn down. The bank could potentially change its lending guidelines, making buyers no longer qualified for a loan program they originally were approved for. The bank could even shut down.
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