Mortgage Commitment Letters, Conditions and Final Approval
Home buyers are often confused about the differences between mortgage commitments, conditions and final approval.
Who issues the commitment letter? What is a conditional approval? Why did the underwriter give me a list of conditions to satisfy, before I can close the loan? How long does it take to reach the final approval?
These are just a few of the questions we receive from our readers on a regular basis. So I thought it might be helpful to explain all of these terms and topics at once, seeing as how they are closely related.
Let's start with some basic definitions:
- Mortgage Commitment -- This is when the lender commits to lending you money. Most of the time, they will issue an actual written document to clarify their intentions. So naturally, it is referred to as the mortgage commitment letter. This letter usually indicates (A) the type of loan being used, (B) the amount of money being borrowed, (C) the length or term of the repayment period, and (D) the interest rate assigned to the loan. Mortgage commitments can be conditional, which means they come with a list of conditions that must be met before the file can move forward.
- Mortgage Conditions -- These are things you must do to receive a final approval from the lender. Conditions are usually issued by the mortgage company's underwriter or underwriting department. With a conditional approval, they are basically telling you "we will approve the loan if you can resolve/satisfy the following conditions." Common conditions include proof of mortgage insurance (when applicable), proof of homeowners insurance, and requests for additional documentation.
It's important to note that the term "mortgage commitment" can be used loosely. That is, it can mean different things when used by different lenders. It is not a regulated or standardized term, but a variable one. So ask questions. Make sure you understand the language and terminology they are using. Don't assume.
For instance, some lenders issue a mortgage commitment letter before the underwriting process, while others issue the letter after underwriting. My goal here is to give you a general understanding of this process. That way, you'll at least know what to ask your lender, when the time comes.
Commitments, Conditions and the Path to Approval
While the precise meaning of "commitment" can be elusive, mortgage conditions are more straightforward.
Conditions are issues that must be resolved before the lender will give you a green light or "clear to close." They are obstacles to the final approval. The conditional approval, therefore, is one that is contingent upon the satisfactory resolution of all listed conditions. You won't be able to close the loan until you resolve all of the issues that arise during the underwriting stage.
Mortgage conditions are typically issued by the underwriter. The underwriting department (which might consist of one person or a small team of individuals) is responsible for verifying and vetting all of the loan documents needed for approval. It's also their job to spot errors, inconsistencies, or qualifying issues that may put the loan outside of the lender's parameters. In other words, they are problem spotters.
Examples of mortgage conditions include the following:
- Providing additional documents needed to verify income, assets or debts
- Paying off outstanding debts in order to reduce the debt-to-income (DTI) ratio
- Providing proof of homeowners insurance and/or title insurance
- Completing a termite inspection of the property being purchased
- Providing updated copies of bank statements
- Explaining certain financial withdrawals, transfers or deposits
- Showing proof that the earnest money deposit check has cleared
- Verifying employment with a letter from the borrower's employer
This list is not exhaustive. These are just some of the most common mortgage conditions issued by underwriters. You might encounter all of these conditions, or none of them. You might even encounter additional items that are not listed above. Mortgage commitments, conditions and approvals vary from one borrower to the next. It is a highly individualized process. Every lending scenario is different, because every borrower is different.
Your Part In All of This
What is your role in all of this, as the borrower? For one thing, you'll need to be patient. The mortgage underwriting process takes longer today than it did during the housing boom. Lenders are more wary of risk these days, due to the financial crisis. Additionally, there are several new lending regulations coming down the line. As a result, lenders are closely examining borrowers and their credentials. So patience is a must.
You can expedite the process by following up on any requests made by the underwriter. The sooner you satisfy the mortgage conditions, the sooner you'll get through the process.
You don't want the ball to linger in your court. If you get some kind of request for additional information or action, handle it as soon as possible. Put the ball back in their court, and then stay in close contact with your loan officer. This will expedite the process.