For most buyers, purchasing a home is a long, tedious, and multi-phased process. A mortgage commitment letter, or MCL, is one of the most important steps in the process. What is it? Why’s it so important?
You may know it by the term approval letter, but this is a financial agreement between the lender and prospective home buyer. You select a lender. You complete that lender’s home loan application. If accepted, the result is an MCL, or approval letter.
Whether you’re just starting to look for homes or have already found your dream home, you want to signify the highest state of readiness to buy a home. This is particularly true in seller-favored markets. This is typically done in approval phases. MCL is the final approval stage for after you’ve found your new home.
The letter signifies that the borrowers have been approved for financing, which means you’ve passed the juggernaut of underwriting and now have official buying power. It also outlines any terms associated with the mortgage so that both you and prospective sellers will be fully aware of what must be checked off to close on a property.
This is the first big exciting step in your home buying process.
Not So Fast
Before you get to that mortgage approval phase, you have a couple of steps ahead of you. So, don’t let other approvals confuse you. While each approval is satisfying in its own right and gets you one step closer to closing, you’ll have three main mortgage commitment stages to traverse. Let’s look at all three so you can understand the process and the differences between MCL and other approvals.
1. Pre-qualification – the first step in your home-buying journey. This step is designed to give you a rough estimate of how much house you can buy. Note the word can. That doesn’t mean should. To improve your chances of approval in the subsequent steps, you shouldn’t set your sights on properties at the top of your estimated buying power. This step generally takes about one working day, and it’s usually offered as free service by most major lenders. Be prepared to offer basic debt, asset, income, and credit info. The lender often takes your details at face value at this point.
2. Pre-approval – the second step in your home-buying journey, and it carries more weight than pre-qualification. This is where you complete the mortgage application. You submit your financial details and documents to be verified by the lender. After going through everything with a fine-toothed comb, the lender’s underwriter will return a decision. In some cases, it’s straightforward approval, but do be prepared to have conditions associated with the approval, especially if your financial history or credit isn’t stellar. In any event, to real estate agents and sellers, this letter shows you’re serious and eligible buyer.
3. Mortgage commitment letter – this is the last step. You’ve been pre-approved for a loan, but you need a property to connect to that loan approval. You’re loan is on pause until you submit information on the house you wish to purchase. Only then can your loan go to the underwriter for loan processing and final approval. You’ll need to sign a purchase agreement on a specific home. An appraisal will be required by most lenders. The home inspection is generally optional. A title search will also be completed to ensure the home can legally change ownership without caveats like liens. If all the above is up to par, you receive your MCL.
What Is Included In The MCL?
Be aware that the mortgage commitment will detail the specifics of your loan, including the exact dollar amount of your mortgage loan; loan number; monthly payment agreement; escrow information if applicable; length and terms of your mortgage loan; and what type of loan you’re using, such as a conventional, VA, FHA, or USDA. Of course, the lender’s info and an expiration date will also be included.
Are All MCLs The Same?
No. There are two different categories of commitment letters. The first is final, meaning you’re clear to buy the home if you do decide to do so. The second is a conditional commitment.
The conditional commitment MCL is a little more involved, and it’s what the vast majority of mortgage applicants initially receive. This simply means that the lender is ready and willing to fund your mortgage, but you’ll have to meet some of their conditions to make the lender more comfortable. The letter will specify what you need to provide, explain, or do and in what time frame you have to complete the tasks.
Some common conditions include things like additional financial proofs or documentation, home or pest inspections, securing a homeowner’s insurance policy, security of downpayment, explanation of unusual deposits or withdrawals from financials accounts, establishing an escrow account for mandated repairs, and so forth.
Do MCLs Expire?
Yes. Whether conditional or final, the lender is only promising the loan for a specified amount of time. If you fail to close within the end date of a final MCL, then you’ll need to start completely over. Yes, you’ll need to reapply for the loan. Likewise, if you fail to meet the conditions of a conditional MCL, then you’ll start completely over in the process.
Of course, there are other considerations if you fail to fund by the expiration date on your MCL. A new loan may have a different interest rate or terms, which could impact the monthly payment and affordability of a particular home. A significant interest rate jump due to market fluctuations could cause your debt-to-income ratio to shift enough for a loan denial if you’re application is on a home at the top of your previous approval amount.
Am I Obligated To Buy After A MCL?
No. You’re never obligated to buy a home until you sign the closing papers. However, backing out after an MCL will most likely mean you lose your earnest money deposit and any money you paid toward inspections.
Are You Ready To Get Your Mortgage Approval?
In closing, learning everything you need to know about a mortgage commitment letter will help your house hunting and mortgage hunting experience go a lot smoother and quicker. There’s an order to things in the mortgage industry. Get your pre-qualification and pre-approval steps completed before you even start looking at houses. You’ll then know what to look at, and you can easily progress to the MCL stage when you find the ideal home at the ideal price.