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About Mortgage Loan Commitment
When you are looking to buy a new home, there are many documents that you have to go through.
After you apply for a mortgage your lender will reserve a specific amount for your loan and would provide you with a letter.
In this post, we will understand what is mortgage loan commitment and how it works in detail.
What Is A Mortgage Loan Commitment?
The mortgage loan commitment is not a legal obligation by the lender to lend the mortgage.
It’s just a signal from the lender to everyone coming to the transaction that the transaction is going well and they can proceed to the final stage of the lending process as planned.
This is to keep sellers who have taken their homes off the market in hopes of closing that transaction. This commitment also helps the real estate agents to close the transaction smoothly.
This commitment by the lender is provided in form of a letter. A mortgage commitment letter is a document that confirms that your lender will approve a specified loan amount as long as you comply with the documents you provided in your mortgage application.
Receiving the mortgage commitment letter means that the lender has finished reviewing your application including your credit score, your assets, and all required qualification to initiate the underwriting process.
This letter is proof that you have received pre-approval from the lender and comply with all required parameters to close the transaction.
What Are The Types Of Mortgage Loan Commitments?
If you think that commitment means an assurance of a loan, you might be getting a little ahead.
These letters could be different based on the lenders you work with. There are two types of mortgage commitment letters that impact your home buying process:
1 - Firm Mortgage Commitment
A firm mortgage commitment is an assurance that the lender will provide you with the loan as per your present financial condition as of the date specified in the mortgage loan commitment letter.
It acts as proof that you have provided all the documentation required, and the lender is ready to provide you with the loan.
For the firm commitment to take effect the borrower may have to pay a commitment fee.
2 - Conditional Mortgage Commitment
A conditional mortgage commitment means that the lender or the bank is going to provide you the loan to purchase the home if certain conditions are met, for example:
- All the structural issues of the property are clear post the home inspection.
- The property appraisals meet the asking price set by the seller.
- No major credits or deposits are made during the loan process.
- The borrower has enough funds to close including estimated closing costs and down payment.
- Proper home insurance covers 100 percent of replacement costs.
- The property has a clear title with no title history issue.
Since the lender is lending you a huge amount of loan, they need to ensure that you can pay back the loan and if not, the lender can sell the collateral and recover some portion of their money.
The conditional commitment protects the lender, and that is why it is important for the borrower that all the conditions are met.
Conclusion
Though the mortgage loan commitment is an assurance from the lender to provide you with the set loan, it is usually not a guarantee that you would be able to close the transaction.
It is important for you as a borrower to have your finances and credit sorted before you apply for a mortgage to make sure that your home-buying process is as smooth as possible.
You might also need to make sure that you do not open any new credit or have any major deposits even after you receive the mortgage loan commitment letter from your lender.
