What is a mortgage commitment letter?

Understanding mortgage commitment letters

A mortgage commitment letter is a document from your lender confirming that you've been preapproved for a mortgage and the specific amount you've qualified for. This proves to sellers that you are a serious buyer and will be able to continue the process if your offer is accepted.

Adam Hamilton, co-founder of REI Hub, which makes accounting software for rental property owners, said, “A mortgage commitment letter gives buyers tangible proof that they can provide sellers, demonstrating that they will be able to secure a mortgage.

“When sellers choose a buyer, they aren’t just looking for someone who will submit the highest offer. They are also looking for someone that they are confident will actually be able to get approved for a mortgage so that the deal doesn’t fall through. Mortgage commitment letters can give them that confidence, benefitting both the seller and the buyer.”

Mortgage commitment letters are usually good for 30 to 60 days.

Most sellers won't consider offers that aren’t accompanied by a mortgage commitment letter, unless it is a cash offer. The letter will indicate your name, the lender's name, the type of loan, the amount you've qualified for and a list of conditions needed for final approval of the loan. These letters are typically good for between 30 and 60 days.

You'll receive a mortgage commitment letter after your application has gone through underwriting. This is when you've been conditionally approved for a mortgage and can start shopping for a home.

Types of mortgage commitment letters

There are two types of mortgage commitment letters: a conditional mortgage commitment and a firm mortgage commitment.

With a conditional mortgage commitment letter, you’re approved under the assumption that additional information will be provided and that this information will be sufficient. But at this point in the process, you may not have a specific property in mind.

With a firm commitment letter, no additional information is needed, and you’re officially approved for the loan. The bank has not only approved you but has also approved the property through the inspection and appraisal process.

Conditional mortgage commitment letter

A conditional mortgage commitment letter means the lender has approved your application based on your initial information but still requires you to meet certain conditions before giving final approval. These conditions (specific tasks or documents you must provide) are outlined in the letter.

Common conditions are:

• Income verification
• Proof of homeowners insurance
• Property inspection or appraisal
• Gift letter (if someone gave you money for the down payment)
• Letter of explanation (for large withdrawals or unusual account activity)
• Any additional paperwork requests

It's important to provide the mortgage company with any information they require. Otherwise, the lender may not be able to approve the loan.

Firm mortgage commitment letter

A firm mortgage commitment is a letter stating that all requirements have been met and the lender will issue the loan. This letter means you’re clear to close on the loan, typically within a set period of time before the offer expires.

The letter will include:

• Your name
• The lender's name
• Property address
• Loan amount
• Type of loan
• Interest rate
• Rate-lock expiration
• Commitment date (when the lender issues the letter)
• Commitment expiration (when the offer expires)

How to get a mortgage commitment letter

You’ll get a mortgage commitment letter once your lender reviews your finances, confirms you're approved and completes underwriting. There are a few key stages in this process:

• Prequalification: At this stage, the lender does a basic review of your financial details and runs a soft credit check. It helps you understand how much you might borrow, but it isn't binding or thorough. You don’t have to submit official documents yet, so your approval isn’t guaranteed.
• Preapproval: Next, you'll formally apply for a mortgage and provide financial documents, including proof of income, assets and debts. The lender carefully reviews these details and runs a hard credit check. If everything looks good, you'll get preapproved, which is usually when you receive a conditional mortgage commitment letter.
• Approval: Once you've chosen a property, the lender evaluates it with an appraisal and possibly an inspection. If the property meets the lender’s guidelines and you’ve satisfied any other conditions from your conditional commitment, you'll receive a firm mortgage commitment letter, officially clearing you to close.

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The role of a mortgage commitment letter in the buying process

A mortgage commitment letter demonstrates that you’re a serious buyer, and if your offer is accepted, the mortgage process won’t delay the sale. You'll include the letter with your offer so sellers can see that you are ready to purchase the property.

Sam May, an area manager at All Western Mortgage, said: "A commitment letter is the lender saying in writing, ‘We'll lend money on this deal, so long as you, the buyer, fulfill X.’ It tells the seller that the buyer and their lender team have done the legwork, and they’re a solid buyer and capable of securing the financing to buy the home.

“This is becoming increasingly important because as the housing market slows, loan officers become more willing to throw around approval letters without validating a buyer's qualifications – in hopes it will stick.” The result is that buyers fall out of escrow — sometimes losing their deposit — because they thought they could buy, but a closer look at their finances shows they can’t.

Once your offer is accepted, you’ll need to meet any remaining conditions to move from a conditional to a firm commitment letter. Lenders often require an appraisal and inspection of the property.