When you apply for a mortgage, you will hear a lot of different terms thrown around. Understanding these terms and how they affect your bottom line will help you get the mortgage that you need. Two of the most confused terms in the mortgage industry are mortgage commitment letter and pre-qualification letter.
Below we help you differentiate between the two terms.
What is the Mortgage Commitment Letter?
The mortgage commitment letter is often confused with the pre-qualification or pre-approval letter, but it is neither of those things. The mortgage commitment letter is a final commitment from the lender that they plan to give you a loan barring any unforeseen circumstances.
Typically, the lender doesn’t write up the mortgage commitment letter until your loan file goes through the following:
- Complete the loan application and provide the proper documentation including your paystubs, W-2s, tax returns, asset statements, and credit report
- The underwriter evaluates your application and supporting documents. The underwriter will make sure everything matches what you said. They may ask for more documentation during this time or ask for more clarification on what you did provide.
- The underwriter evaluates the appraisal. They need to make sure that the home is worth at least as much as you agreed to pay for the home. The underwriter must also make sure that the home passes any of the specific loan program requirements.
Once all of these steps are complete, the lender may be able to write up the commitment letter. The letter may include a few conditions, but they aren’t anything major, like the appraisal. The conditions may be about your proof of insurance, an additional bank statement, or one last paystub just to prove that you are still employed by the closing.
What is the Pre-Qualification Letter?
The pre-qualification letter is almost the exact opposite of the mortgage commitment letter. The pre-qualification a lender provides you with has no merit behind it. The lender gives their best estimate on how much loan you can afford based on the information you provide.
The main difference between the pre-qualification letter and the mortgage commitment letter is that there isn’t any substantiating evidence behind the pre-qualification letter. You don’t have to provide the lender with any evidence of your income or assets. You tell the lender how much you make each month, how much you have saved for a down payment, and what debts you have. The lender will pull your credit to see your credit score and to check your debts, but that’s the only official evidence they have with a pre-qualification.
Basically, the pre-qualification letter is a lender’s intent to provide you with a loan of a specific amount, but it is contingent on a large number of conditions. It’s often the first step in the process, but it doesn’t hold any weight, even when you shop for a home.
The Pre-Approval Letter
The step in between the pre-qualification letter and the mortgage commitment letter is the pre-approval letter. This letter is proof of the lender’s intent to give you a loan, but it’s typically based on a few conditions that don’t have anything to do with the borrower himself, but rather the property.
In order to get a pre-approval letter, you must apply for the loan and supply any borrower-related documents, such as your paystubs, W-2s, tax returns, and asset statements. The underwriter will review these documents and conditionally approve you for the loan. As we stated above, the conditions are usually related to the property including:
- Title work
- Homeowner’s insurance
- Flood insurance
The pre-approval letter is what sellers want to see because it helps them know that you are a serious buyer. Without the letter, they don’t know if you can even get the financing that is necessary to buy the home. While it’s not the mortgage commitment letter, it’s more than just a prequalification letter.
If you are ready to buy a home, you want the pre-approval letter. If you are just starting out and have no idea what you can afford, the pre-qualification letter will suffice. If you already signed a purchase contract and have a closing date, that mortgage commitment letter is the only way you will get to the closing.