There is often confusion regarding the difference between a pre-qualification letter and mortgage commitment letter. The two letters, although they sound similar, are completely different. If you are in need of a mortgage commitment letter, yet show up with your pre-qualification letter, you will not be able to secure the house that you want. On the other hand, when you just start shopping for a home, a mortgage commitment letter will not be necessary, nor will it be ready until you find a home to purchase. Understanding the difference between each type of letter will make the home buying process easier for you.
The Pre-Qualification Letter
A pre-qualification letter is a letter that a particular lender creates for you stating the amount of home that you can afford. It will state the amount of the loan that you are being offered as well as a few particular details, depending on your situation. Some lenders will state the percentage of the sales amount that you are required to put down on a home, the interest rate that you are being quoted at the moment and the term of the loan. Every lender will have their own wording and requirements regarding what needs to be on the letter in order to be effective. Every letter, no matter who writes it will have the date that the letter was created and the date that it expires, which is typically 30 days from the date it was written.
Verifications are Still Necessary
A pre-qualification letter does not require you to have any of the data that you provided to the lender verified. This means that based on your credit and the numbers that you wrote on the application, that you are pre-approved for a particular loan amount. It does not mean that you are guaranteed a loan. This is only possible after all information that you provided is verified and proven to be true. The lender will also need to have an official appraisal of the property that you are planning to purchase in order to determine the exact loan-to-value ratio as well as to determine if the property meets the requirements of the loan program. The pre-qualification letter is subject to many conditions that are often detailed in the letter including the verification of your employment, income and assets.
The Mortgage Commitment Letter
The mortgage commitment letter is a step up from the pre-qualification letter. This letter is not created until all of your information has been verified and approved. As the name states, this letter is a commitment to provide financing. It shows the seller or builder that you have secured financing and that you are just waiting for the home to be ready to be purchased in order to close. The mortgage commitment letter is not released until your income, assets, employment, credit and appraisal have been evaluated and verified. The only thing that should be outstanding when a mortgage commitment letter is created is for the home to be ready to move into. There should not be any conditions outstanding when you receive your mortgage commitment letter.
Understanding the difference between a pre-qualification letter and a mortgage commitment letter is essential to a successful home purchase. A pre-qualification letter is good to have with you when you are shopping for a home because it shows sellers and/or realtors that you are serious about buying a home and that you have the ability to do so. A mortgage commitment letter is often necessary by a date specified in the contract. This is the date that the seller wants a clear to close commitment from the lender with no contingencies or they will have the right to put the home back on the market. Both letters will help you to secure a home, but they both perform very different tasks in the process.Click to See the Latest Mortgage Rates»