What is a Mortgage Commitment Letter and Do I Need One When Buying a New Build?
Shopping for a new home is an exciting time, filled with anticipation and possibilities. While finding exactly the right home for your family’s needs is the main goal, you do need to look at the process overall. One of the key components of the home buying process is making the offer, which means you need a mortgage pre-approval and with that comes the mortgage commitment letter.
A mortgage pre-approval reviews your credit history, credit score, current employment and income, and any outstanding debts you have. At this stage, lenders preliminarily determine your qualification for a loan and the amount you’d qualify for in your current situation. From this, they issue you a mortgage commitment letter.
Let’s find out more about this important document and what part it plays when it comes to buying your new home.
What is a Mortgage Commitment Letter?
A mortgage commitment letter comes from your mortgage lender, and it verifies that they are planning to approve your home loan. There are stipulations, ie: you must continue to comply with all of the information you provided in your application.
Now, there are two types of mortgage commitment letters: conditional and final.
The conditional mortgage commitment letter is issued to you before you make an offer on a home. It outlines the amount of mortgage you preliminarily qualify for, along with any conditions that must be met to officially qualify for the mortgage. These conditions may include reduction of debt, the sale of your current house, or other related actions that need to be taken prior to the mortgage being offered.
A final mortgage commitment letter is a promise by the lender to offer you the mortgage for your new home. This is issued after you’ve met the conditions outlined in your conditional letter. It outlines the statement of approval for the loan, as well as the terms and interest rate. There will be an expiration date as well indicating the date by which you must purchase your home and instate the mortgage. If you haven’t purchased a home by this expiration date, your mortgage interest rate and terms may change, and you will need to requalify at the new rate.
Do I Need A Mortgage Commitment Letter To Buy A Brand-New Home?
It’s not necessary to already have a commitment letter from a lender to start exploring new homes from a builder, but you will need one before you make an offer to purchase. At Sterling Homes, our Area Sales Managers are equipped to help you through the pre-approval process, so you can obtain your mortgage commitment letter from a lender we already work with. Our Area Sales Managers work with buyers in various credit situations, so it could be helpful for you to work with us on your mortgage pre-approval.
It’s important to be aware of how much mortgage you may qualify for before you have your heart set on a certain home. Imagine falling in love with a floor plan only to find you qualify for less than you need to buy the home. Getting your mortgage commitment letter gives you a price range and allows you to choose a home within that range, knowing you’ll qualify for the mortgage when you make your offer to purchase.
Just be cognizant of the expiration date on your letter as you must purchase a home before that date to ensure you retain the interest rate and terms you’ve qualified for.
Should I Buy A Home At The Top Of My Pre-Approved Price Range?
A mortgage commitment letter is not a guarantee you’ll qualify for the mortgage, as there are many moving parts involved. Rather, it’s a promise from the lender to offer you a mortgage should all the conditions be met, and nothing changes in your financial status that could affect your qualification. Being aware of your complete financial situation is important for deciding whether you should push the limits of your pre-approved price range when purchasing a new home.
Consider that you’ll have other expenses on top of your mortgage payment for the duration of your homeownership. At the time of purchase, you’ll have a down payment to apply, closing costs, and legal fees. For the duration of homeownership, you’ll need to do regular maintenance to the home and have funds set aside for unexpected repairs. You’ll have the cost of utilities as well, which can fluctuate and increase significantly as we’ve seen in the last couple of years. You’ll want to be sure your mortgage payment isn’t eating up more of your monthly budget than you can handle with these other expenses.
If you’re buying a brand-new home, you’ll also need to consider the post-possession costs of landscaping, fencing, and other items that may not be included in your mortgage at the time of purchase. Leaving room in your budget for these items ensures you’ll be able to complete them within certain timelines.
Ideally, you should determine the mortgage payment that best fits your overall monthly budget and choose a new home within that parameter. You’ll be much more comfortable in your new home and can truly settle in and enjoy it.
Obtaining a mortgage commitment letter will help you be more informed about your mortgage qualification status, empowering you to choose a new home that fits your budget. Remember, this letter is not a guarantee you’ll qualify, so be sure to meet all the conditions outlined in your letter prior to making an offer on a home. It’s also important to avoid changing your financial status by applying for other new loans before you’ve closed on your new mortgage.
The closer you can stick to the conditions on your mortgage commitment letter, the smoother your new home purchase will be for you and your family.
Photo credits: depositphotos.com
About the Author:
At Sterling Homes, our mission is to provide the opportunity for affordable homeownership without compromise. Over the last 70 years, Sterling Edmonton has quickly become one of Edmonton’s most popular builders. We bring more than seven decades worth of exceptional customer service, superior design and unparalleled craftsmanship to the greater Edmonton area. As a member of the Qualico Group, Sterling Homes focuses on greater Edmonton’s finest family communities, while being able to offer some of the region’s most family friendly prices thanks to volume purchasing power for materials, trades and land. This has not only made Sterling one of Edmonton’s bestselling, move-up builders, but also one of the industry’s most respected home providers. It is through our uncompromising commitment to our customers that we proudly deliver the Sterling Advantage – that’s why each and every home we build includes a 10-year home warranty, a completion guarantee and new home warranty excellence rating. Our Advantage is our pledge that, when you build your dream home with Sterling, we will deliver a timely, well-built home you’re sure to enjoy for years to come.
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