What is a loan commitment letter?
A loan commitment letter a.k.a mortgage approval letter is an agreement letter that contains the lender’s promise to provide a loan to the borrower at an agreed-upon interest rate and terms. This letter is proof that the buyer will be able to finance the purchase of the house and it is needed before closing the sale.
Without the loan commitment letter or cash to cover the entire purchase, the sale will not take a place. Before getting the loan approval letter, the lender will provide a pre-approval letter that will be used by the buyer when house hunting.
Pre-approval letter?
Unless you are financing the house with your own cash, you must get a mortgage. Before the loan approval letter, a pre-approval letter must be obtained.
A pre-approval letter shows how much money you are qualified to borrow and the interest rate you will be paying on the loan.
The lender assesses your income, credit score, and assets when determining how much money you are qualified for. After this process, you will receive a pre-approval letter that will be used to show the seller that the bank will give you money. For this reason, offers from buyers with pre-approval letters stand-out the most.
How to get a pre-approval letter?
Before you apply for a pre-approval letter, you must gather all information necessary to increase your chances of getting approved. The following are some of the steps you can take to get a pre-approval letter.
- Inspect your credit score: Before you apply for a pre-approval letter, you must check your credit score and make sure that it meets the lender’s requirements. Having a good credit score will increase your chances of obtaining the pre-approval letter. If your credit score is not good, you should consider improving your score first. Otherwise, you could be denied for the letter.
>>MORE: 8 Tips You Can Use To Improve Your Credit Score
- Know your mortgage options: Depending on your financing process and down payment options, you can choose a mortgage type that will serve you better. For example, if you have a 20% down payment, you can consider having a conventional mortgage.
- Shop around to find the best mortgage provider: You will find the best provider by shopping around. Starting with your bank will be a good idea.
- Get the pre-approval letter: After the lender of your choice pre-approves you for the loan, he will tell you the amount you are qualified for and the interest rate. You will also receive a pre-approval letter that you can use to shop for properties.
Getting a Loan Commitment Letter
After finding a property of your choice and submitting your offer, the seller of the house will accept the offer or deny it. When the offer is accepted, the seller will need assurance that you have the money to buy the house.
You can either buy the house with cash or use a mortgage.
If you are using a mortgage, you must prove to the seller that a bank will give you the money. Without the loan commitment letter, the sale of the property will not happen.
The lender must have information about the house you want to buy and both of you (you and the seller) must be approved by the lender. In addition, a purchase agreement must be present and signed by all parties involved in the sale of the property, before the loan commitment letter is provided.
Furthermore, the lender will need to know the proper market value of the house and make sure that the house is not trashed. That is an appraisal must be performed to estimate the value of the house, according to Quicken Loans. A house inspection will also take place to make sure that the house is not junk.
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