What is a Mortgage Commitment?
Also known as a loan commitment, a mortgage commitment is a document that is prepared by a buyer’s bank, and addressed to the seller of some type of real estate or property. The document provides written proof that the bank is willing to advance the buyer a specific sum, in the form of a mortgage loan, in order to complete the purchase of the property. Documents of this type are usually highly detailed, including information regarding interest rates and how those rates are applied to the principle of the loan. In most cases, the mortgage commitment will also carry an expiration date, a measure that can protect the lender from unforeseen factors that would make the extension of the loan inadvisable.
A mortgage commitment should not be confused with the more simplistic pre-approval letter. There are several key differences. First, the pre-approval letter does not provide the degree of detail found with the commitment letter. Often, the text of the document will do no more than confirm the principle amount of the loan itself. The other details are rarely if ever included within the text of this type of letter.
Second, the pre-approval letter is not usually a legally binding document. This is in contrast to the mortgage commitment, which is considered legal and binding. Third, a pre-approval letter is not necessarily prepared after the commitment is complete; some lenders will issue a pre-approval letter based on their expectation that the buyer will qualify for the loan. In order to ascertain the true status of the mortgage loan, it is necessary to obtain a copy of the mortgage commitment as well as the pre-approval letter.
A buyer should always make sure that a mortgage commitment exists before making any type of down payment on a piece of property. This will prevent any type of miscommunication regarding the status of the mortgage loan. In the event that the mortgage application is not approved for some reason, and a mortgage commitment letter is not prepared, the buyer does not incur the loss of that deposit when he or she cannot complete the transaction.
Buyers should also look closely at the expiration date that is included in the text of the mortgage commitment. Should the buyer attempt to purchase property after that date has passed, there is a good chance that the loan qualifying process will have to be repeated. If the buyer has experienced some changes in his or her credit rating, level of income, or other key factors, it may not be possible to obtain a new commitment with the same terms, or even obtain a commitment letter at all.
I signed the commitment letter. is signing this letter is legally binding for me? If I want to cancel and go with another bank that is offering better deal, is there any risk for me?
I wanted to add that I was preapproved for a mortgage with my bank, but when I found a property they would not finance it. It was a condo that was on the beach which had a high amount of renters. Their objection was the fact that the building fell below the 50% owner occupancy rate and the building had a 24% foreclosure rate.
So just because you are preapproved for a mortgage does not mean that the bank will approve the purchase of the property that you choose. The mortgage loan commitment is more binding in that regard and really spells out the mortgage terms in detail.
I ended up getting a home equity line on another property which offered me another mortgage option and financed the property that way. The nice thing about the home equity line is that it was a no fee mortgage so there were no closing costs associated with my loan.
I would not recommend this path for everyone, but our home that we took an equity line on was paid off so we essentially only had one mortgage so it was not too risky. I would not have done this if I had an existing mortgage on my property because I think that having two mortgages is a little risky.
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