Mortgage Commitment Letter – the real loan approval letter
December 21st, 2008 by Mark FlandersJohn and Mary are frightened and more than a little upset. They need to ask for an extension on the closing of their new home purchase because the financing is not ready. They made an offer on their new home 26 days ago and had no idea their Loan Approval Letter was not worth the paper it was written on! Now their Earnest Money is at risk and the money they already spent on a moving company is in question. In addition, they have already paid for the appraisal.
When is a loan approval not a loan approval?
This is not a frequent occurance. It does happen often enough that savvy Realtors® and experienced sellers are somewhat wary of Mortgage Pre-Approval Letters from loan officers they don’t know through previous transactions. The reason they are wary is simple. Experienced Realtors® know that Pre-Approval Letters are written by loan officers, and loan officers can’t approve loans!
The who’s who of a mortgage transaction.
A Loan Originator is the real name for a person like me who is more commonly called a Loan Officer. A loan originator does exactly what the title implies. He or she creates (or originates) mortgage business. A loan originator’s primary job is to supply a never-ending flow of new loan clients. The title of Loan Officer is rather misleading. A good loan originator does not have to work very hard to maintain a flow of business. Previous happy clients and satisfied Realtors® will keep him or her pretty busy without the need to spend much time marketing.
After they find a client to work with, loan originators are responsible for making certain everything that must be done to close the loan, is indeed accomplished. This includes coordinating a Title Company, an Appraisal Company, a mortgage processor, two Realtors® (one for the buyer and one for the seller) and of course, the borrower. But, a loan officer does not approve loans.
The Loan Underwriter is an employee of the bank. The underwriter’s job is to make sure the borrower (represented by the Loan Originator) fits the Lenders Guidelines for Approval. The underwriter is the person who actually approves the mortgage loan. Very few borrowers ever speak with a Loan Underwriter. Many underwriters prefer it that way. They are busy people who want to be able to move quickly from one loan to the next. There jobs are dependent on speed and accuracy. Getting bogged down with client phone calls does not help with either speed or accuracy.
Whether you, as a borrower, are working with a Bank or a Mortgage Broker, your primary contact is probably a Loan Originator, not an underwriter.
How do you make sure your Pre-Approval Letter is worth something?
A Loan Commitment Letter is the document an underwriter sends to the loan officer once a loan is approved. This is the real thing! A commitment letter will detail every aspect of the mortgage. It will include the terms and interest rate. It will itemize the “Conditions” (the items that must be provided or explained for final approval). The commitment letter will be dated and it will have an expiration date. It may be signed by the underwriter. The Loan Commitment Letter is a formal, legally binding document.
So, if you want to be sure your pre-approval is really an approval, request to see the Commitment Letter! If you are unfamiliar with anything in the letter, have your loan officer explain the unfamiliar portions. It is after all, your loan commitment letter and there is no reason you shouldn’t see it!
In Washington State and many others, the seller has the right to request this proof from the Buyer’s Agent. If the seller has a savvy Agent, the Agent will verify the validity of the Pre-Approval Letter by requesting a Loan Commitment Letter.
In John and Mary’s case, had they simply known to ask for a copy of their Loan Commitment Letter, they would have found out that the loan was not yet approved when the Pre-Approval Letter was written. It shouldn’t have happened the way it did, but this happens often enough that as an educated borrower, you must verify that your pre-approval is a genuine approval.
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Tags: bremerton real estate, first time homebuyers, port orchard real estate, poulsbo real estate, silverdale real estate
Really now people are afraid of mortgage as most of them aren’t able to pay in time as their budget most of the times doesn’t allow them to pay for mortgage.
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Very few borrowers ever speak with a Loan Underwriter. Many underwriters prefer it that way. They are busy people who want to be able to move quickly from one loan to the next. There jobs are dependent on speed and accuracy. Getting bogged down with client phone calls does not help with either speed or accuracy.
A loan originator’s primary job is to supply a never-ending flow of new loan clients. The title of Loan Officer is rather misleading. A good loan originator does not have to work very hard to maintain a flow of business.
I think a lot of the responsibility lies with the LO handing out the “pre-approval” letter, they should inform whomever they give it to that it isn’t a true approval, and that they shouldn’t start making decisions based upon the “pre-approval”. Not to mention if it is a brokerage handing it out, how would they even know what lender they would be using at that point? Without an explanation of what that “pre-approval” letter truly is, to hand one out would be irresponsible as a professional.
It’s commonplace (as far as I understand) to make an offer on a house with just a ‘pre-approval’ in hand. One commenter above noted that you need to get 100% prequalified, not just pre-arpproved. Serious? That’s wholly inaccurate. Preapproval is stronger than prequalification. You can go make an offer on a house with either, but a seller would prefer to see the preapproval letter.
At least from what I know, you don’t really get to the “Commitment Letter” stage until later in the game after your offer has already been signed around, because the underwriter can’t commit to funding a loan that doesn’t have a purchase agreement behind it. Makes sense: why would they commit in a legally binding way to loan you an undetermined amount of money for some future offer? Maybe if you’re Bill Gates or the like…But, I think in most cases, you should do this if you’re looking for a home:
1) Get some quotes and find a few good lenders – they’ll prequalify you based on minimal info.
2) Select a likely lender to use, and get a preapproval.
3) Make an offer and present a custom preapproval letter for that offer (i.e., have the lender give you a preapproval for the exact amount you are offering, since you don’t want the seller to know what you are ultimately approved for)
4) When your offer is accepted, now the real hunt begins: contact many good lenders and get their rates (and points) and lender fees. Ignore (for the most part) all 3rd party fees that the lender doesn’t control (e.g., title, insurance, tax impounds, etc.). Make an apples to apples comparison at a given rate to see who’s cheapest (assuming both lenders are trustworthy)
5) Apply for a loan. This is where you give all your info, the lender/broker runs a credit report on you, and requests full documentation of your finances, etc.
6) Once your loan package is put together, it goes to the Underwriter. At this point, the Underwriter should have everything they need in order to Approve your application, and Commit to make you the loan, or to reject you.
You see, you can’t get to stage 6, where you get a firm loan commitment, without starting with the pre-qual, pre-approval, purchase agreement (for the home you’re buying), application, and providing all the supporting documentation.
I know this, because I’m in the middle of this myself…I close in 2 weeks.
This is one of the biggest potential pitfalls. Be sure to get 100% pre-qualified and not just pre approved or there is a risk of something going wrong. Especially with underwriting guidelines getting tougher.
Thanks for an explanation what differences the loan originator and the loan underwriter have. It was very useful for me to understand their functions. Bookmarked your blog.
Huge thanks for sharing this information about loan approval system. I plan to take a loan so I am searching for all kinds of information regarding it. It is written everywhere in a hard way but I am dumb in these things. In your article everything is explained in a normal language, so I am able to understand everything! Thanks one more time for that.
Hi Mark,
I’m a Realtor in Redding, CA – somehow I stumbled upon your Blog (through AR)…I found this article (which you wrote back in December) to be very informative, clear and easy to understand – for the average person.
You do a great job.
Maria