Pre-approval letters are nearly mandatory in today’s real estate market. They have been around since the mid 1990s when I became a Realtor. A few years ago, an additional option for verifying the buyers’ loan status became available and incorporated into our standard Minnesota Purchase Agreements. This additional tool is often called a "Mortgage Loan Commitment."
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-appproval letters assure sellers that the potential buyers have met the basic criteria for obtaining the loan. Loan officers will have verified the buyers’ 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 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 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 a loan committment letter protects both sellers and buyers from unexpected problems with the financing right before the closing date!
Common issues which can negate a pre-approval letter 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 damages which are unacceptable or home owners associations which don’t qualify for financing.
The Minnesota purchase agreement offers an option for sellers to require buyers submit a loan commitment letter by a certain date in order 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.
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!