Home buyers are often confused about the terminology used for loan approvals. Mortgage commitments, in particular, are a common source of confusion.
Part of the problem is that the terminology can be used in different ways by different lenders. But there are some common definitions used by most lenders most of the time.
Let’s start at the beginning of the mortgage application process. Most borrowers get pre-qualified or pre-approved by a lender before they start shopping for a house. This is when the lender reviews the borrower’s financial situation to determine how much they are willing to lend them.
Pre-approval accomplishes two things:
1. It helps the borrower narrow the house-hunting process to a certain price range.
2. It also makes sellers more inclined to accept the person’s offer, because they’ve been reviewed by a lender.
Of course, if you’re refinancing an existing mortgage, these two things are irrelevant. I’m just putting the mortgage commitment and final approval into a broader context, for those readers who are purchasing a home.
The Mortgage Commitment
So you find a house and make an offer to buy it. The seller accepts your offer. You now have a purchase agreement that you can take back to the lender who pre-qualified or pre-approved you. This is the final item the lender needs to give you an actual mortgage commitment. But it’s not the same as a final approval. In fact, the word “commitment” can be deceiving.
Most of the time, the commitment will come with a list of conditions that need to be addressed and resolved before the loan can be closed. These conditions and requirements typically come from the underwriter. The underwriter works for the mortgage lender and ensures that each loan conforms to a certain set of guidelines (the lender’s guidelines, as well as those imposed by Freddie Mac, Fannie Mae, or the Federal Housing Administration).
As the borrower, you must resolve all of these conditions before you can get a final approval on your loan. For this reason, the commitment is sometimes referred to as a conditional approval.
Conditional and Final Approval
Additional documentation is one of the most common conditions issued with a mortgage commitment. This is where the underwriter requests additional documents to explain or amplify the borrower’s income, debts, assets, or other pieces of the financial picture. There are other types of conditions too, but I don’t want to wander too far off course.
The thing to understand is that a mortgage commitment and a final approval are not always the same thing. In most cases, the lender’s commitments will come with a list of conditions that have to be met. It’s the lender’s way of saying you can get the loan once conditions A, B and C have been resolved.
Once all of the conditions have been met, you will be “clear to close.” This is when the underwriter gives a green light on the loan, and the lender issues a final approval. You’re pretty much home free at this point.