What is a mortgage commitment letter and how does it help buy a home?

On the path to buying a home, you’ll look over many documents related to the transaction and — assuming you’re financing the purchase — your mortgage. One of these essential pieces of paperwork is the mortgage commitment letter.

You can get a conditional mortgage commitment letter by going through the preapproval process and a more final commitment letter after a formal mortgage application. Here’s how these letters work.

Types of mortgage commitment letters

While you might think a commitment means “yes,” all commitment letters aren’t created equal in the mortgage world. There are two types of these letters with different implications for your buying power and your path to becoming a homeowner.

Conditional mortgage commitment

A conditional mortgage commitment letter is the more common type, the one that indicates you’ve been preapproved for a loan. This type of letter generally includes the following information:

• Name of lender providing the letter
• Your name
• Statement of preapproval
• Loan type (fixed- or adjustable-rate)
• Preapproved loan amount
• Conditions that must be met
• Length of time preapproval lasts

Obtaining a conditional mortgage commitment letter doesn’t mean you’re sure to get the loan or even the specific sum the lender mentions. It simply means that the lender agrees to finance a home purchase if certain conditions are satisfied, such as:

• An appraiser verifies that the home is worth at least the price you agree to pay
• A home inspector evaluates the property, and any issues that come up are resolved
• You have enough money to cover the down payment and estimated closing costs
• You have a homeowners insurance policy in place
• There are no issues with the title
• There are no major changes to your finances before closing

These conditions are designed to provide additional protections for the lender. You, as a borrower, must ensure that they are all met.

Despite these limitations, the conditional mortgage commitment letter usually satisfies sellers that you are a serious buyer who has the financial means for an offer you make.

Firm mortgage commitment

As the name implies, a firm mortgage commitment is more of a solid promise that the mortgage lender will loan you the money to buy a home based on your current financial situation (as of the date on the letter).

Occurring farther along the road — after you’ve found a home and signed a purchase and sale agreement — it is evidence that you’ve formally applied for a loan, and answered all the application questions. It indicates the lender is ready to loan you a specific sum for a specific property (in contrast to the conditional letter), at a designated interest rate. You might need to pay a commitment fee for this “firm” commitment to take effect.

The firm mortgage commitment letter includes many of the same details as the conditional mortgage commitment, as well as some additional information, including:

• Name of lender
• Your name
• Address of home to be purchased (if an offer has been made)
• Statement of loan approval
• Loan type
• Amount of loan
• Interest rate associated with the loan
• Loan term (such as 15 or 30 years)
• Date of commitment

Both kinds of mortgage commitment letters have expiration dates, indicating how long the offer and its terms are good for.

When do I get a mortgage commitment letter?

Before you can get a mortgage commitment letter, you will need to go through certain steps.

Prequalification

Prequalification is an informal evaluation of your finances, including creditworthiness and income. It allows the lender to give an estimate of how much you may be qualified to borrow should you take out a home loan. Prequalification will help you figure out how much money you can borrow, but unlike the preapproval process, it isn’t based on hard checks or verification by your lender — it’s all self-reported info. It’s a voluntary step, but can be useful in giving you a ballpark estimate of how much you could borrow.

Preapproval

Next, you will need to be preapproved for a mortgage. Usually, that involves filling out a form with your lender and providing it with some basic financial information (or permission to check such information), including your credit history, tax returns, proof of income, debt-to-income ratio, and other details of your financial profile.

Lenders usually do a hard credit check when you seek preapproval. Once you’ve gotten preapproved, your lender will send a conditional commitment letter outlining the details of the potential mortgage.

Most people take the preapproval step at the start of their home search. When you know how much money you can borrow, you can bid on a home, and the preapproval commitment letter will help show the sellers you are not only serious about buying, but are in principle “good for it” — and will likely be approved for a mortgage.

Mortgage application

A final mortgage commitment letter usually arrives after you have made an offer, been accepted, and formally applied for a mortgage loan. It means the lender has finalized the underwriting (its background check into your financial affairs, credit history, and employment record), has investigated the property’s title and value, and is agreeing in principle to give you a loan to buy it.

Does a mortgage commitment letter mean I am approved?

A commitment is not synonymous with an approval. While receiving a firm commitment or a conditional commitment are both positive pieces of news on your homebuying journey (especially the firm letter), this isn’t the end of the application process. You might still need to provide some additional documentation, and you’ll need to stay the course all the way through to your closing date.

Why is the mortgage commitment letter important?

A mortgage commitment letter is a crucial document that shows you’re a qualified homebuyer. While the mortgage commitment letter might be addressed to you, you’re going to want to show it to two other parties: The real estate agent helping you with your search and the seller of the home you want to buy (or their agent).

In today’s competitive housing market, you’ll have a better chance of the seller considering your offer more seriously if you’ve a commitment letter in hand. It proves that you have funds at your disposal.

Next steps after mortgage commitment letters

You might receive your conditional mortgage commitment letter within a few minutes or a day of being preapproved. Now, it’s time to put that letter to work and find a home to buy.

Remember, though, the letter not an open-ended promise to loan you money. It likely includes a certain window — 45 days, for example — for your loan terms. You’ll need to pay especially close attention to the conditions, to ensure you take care of all the lender’s requests. Don’t be afraid to ask your lender about anything you don’t understand.

Even after you receive a final mortgage commitment letter, you’ll still have plenty of steps to check off before getting to closing — and a new window, which usually aligns with your mortgage rate lock date. Be responsive to all additional questions from your lender, and avoid making any common financial mistakes prior to closing day.

Mortgage commitment letter FAQs

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

  What a lender is willing to lend and what you can truly afford are different things. While the lender may believe that you can swing the payment on the maximum loan they’ll give you, that doesn’t mean it’ll be a good fit with your lifestyle, budget, and expenses—especially in your new home. You don’t want to end up house poor, spending almost all your income on the home and strapped for everything else. Just because they offer it doesn’t mean you have to take all of it. Using a how much house you can afford calculator is a better way to see how much you can reasonably borrow and handle month-to-month.
  

• What happens if the commitment expires?

  If your mortgage commitment letter expires, you’ll just have to go back to your lender to get a new one. They may want updated pay stubs and bank statements and may take another look at your credit before issuing a new letter. Depending on how your situation has changed, the lender may change the details in the letter, such as the maximum loan amount.
  
  

• What happens after receiving your mortgage commitment letter?

  A mortgage commitment letter is not the same as final approval, but it shows that you’re in a good position to buy a home. Once you make an offer on a home and the seller accepts it, you can move on to the full application process, which involves a more in-depth review of your finances and the property you want to buy.
  

• Can a mortgage commitment letter be revoked?

  While a mortgage commitment letter is a legally binding contract, it does not constitute final approval for a mortgage. And if your financial situation changes at all after the commitment letter was issued and you no longer meet the conditions for approval, a lender can opt to withdraw its offer. Until you actually sign a mortgage contract, it is still possible for the lender to deny the loan.
  

• Can I use a mortgage commitment letter to negotiate with sellers?

  A mortgage commitment letter shows a seller that you are a serious buyer who has the funds — or at least the financial backing — to purchase their home. This can put you in a better bargaining position or give you an edge compared to other buyers who lack a letter.
  

• Can I switch mortgage lenders after receiving a commitment letter?

  Yes. You are not committed to borrowing from a specific lender until you sign closing documents and receive the funds.