23 Apr Pre-Approval Letter and Loan Commitments. What’s the Difference?
Pre-approval letters are nearly mandatory in today’s real estate market. They have been around since the mid 1990’s when I became a Realtor.
A few years ago, an additional option for verifying the buyers’ loan status became available. This additional tool is often called a Mortgage Loan Commitment. They are now being incorporated into our standard Minnesota purchase agreements.
What’s the difference between a pre-approval letter and a loan commitment letter?
The pre-approval letter is written by a loan officer and submitted by the buyer along with their purchase agreement. Pre-approval letters assure sellers that the potential buyers have met the basic criteria for obtaining the loan. Loan officers have to verify the buyers’ income, credit score, debt levels and down payment source. There is also a program called desktop underwriting, or DU. This allows loan officers to run the buyers’ scores and data through an automated underwriting program to be sure of their qualifications.
A loan commitment letter is issued when the buyers’ information has been reviewed and ‘cleared to close’ by an underwriter. Sometimes a loan commitment letter will be issued showing a few additional conditions which need to be met. These conditions will need to be done before a ‘cleared to close’ can be issued. This letter is important because many things can come up between the time of pre-approval and final underwriting of a loan.
Using the loan commitment letter protects both sellers and buyers from unexpected problems with the financing right before the closing date!
Some issues can negate a pre-approval letter. Common issues include changes in buyers’ credit score, loss of income, changes in available cash for downpayment, low appraisal on the property or other property conditions.
Loan commitment letters are very important for an additional reason. This letter serves as the bridge between a pre-approved buyer and a property which will qualify for the loan. Many properties create the disqualification of the loan because of unacceptable damages or Home Owners Associations that don’t qualify for financing.
The Minnesota purchase agreements offer an option for sellers to require buyers to submit a loan commitment letter by a certain date. This is to ensure the continuation of the purchase agreement. I advise sellers to request this letter on nearly all purchase agreements. We request the letter about 30 days from the date on the purchase agreement.