Health & Fitness
What’s the Difference Between a Pre-Approval Letter and a Loan Commitment?
Pre-approval letters are nearly mandatory in today's real estate market. But a few years ago, an additional option called a mortgage loan commitment became available.
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 is submitted by the buyer along with their purchase agreement. Pre-approval letters assure sellers that the potential buyers on their home have met the basic criteria for obtaining the loan. Loan officers will have verified the buyer's income, credit score, debt levels and down payment source.
There is also a program called Desktop Underwriting, or DU, which allows loan officers to run the buyer's scores and data through an automated underwriting program to be sure of their qualifications.
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A loan commitment letter is issued when the buyer's information has been reviewed by an underwriter and they have been 'cleared to close.' Sometimes a loan commitment letter will be issued showing a few additional conditions which need to be met 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 committment letter protects both sellers and buyers from unexpected problems with the financing right before the closing date!
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Common issues which can negate a pre-approval letter include changes in buyer's 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 that will qualify for the loan. Many properties create the disqualification of the loan because of damages that are unacceptable, or home owners associations that don’t qualify for financing.
The Minnesota Purchase Agreements offer an option for sellers to require buyers submit a loan commitment letter by a certain date to ensure the continuation of the purchase agreement. I advise sellers to request this letter on nearly all purchase agreeements; we request the letter about 30 days from the date on the purchase agreement.
For more information on this helpful tool when negotiating purchase agreements you can send your questions to Sheryl@Petrashek.com, or give me a call at 612-889-6496. We are here to assist you!
