Mortgage Commitment Letter vs. Clear to Close: An Overview
A mortgage commitment letter is a letter issued by a bank or other lender stating that it has approved you for a home loan, although certain conditions may still need to be met. When the lender issues a clear to close, it means that all of the conditions for the loan have been satisfied and you're just a few signed documents away from becoming a homeowner.
Key Takeaways
- A mortgage commitment letter is a document issued by a lender that confirms its willingness to provide a loan to the borrower.
- Clear to close refers to a later stage in the loan approval process where all conditions have been met and the loan is ready for closing.
- Both the mortgage commitment letter and clear to close are crucial milestones in the home buying process.
- The mortgage commitment letter and clear to close provide assurance to both the buyer and the seller that the money is available for a sale to go through.
Mortgage Commitment Letter
A mortgage commitment letter is a document that indicates a lender has reviewed your mortgage application and intends to give you a loan. You may receive two different types of mortgage commitment letters at various stages in the home-buying process.
- Conditional commitment letters mean that a lender has basically approved you for a loan but you must still meet certain conditions.
- Firm commitment letters are issued when the lender is ready to fully approve you for the loan after its underwriting process is complete.
Both types of commitment letters can include the same basic information. You should see the following details listed:
- Your name and the lender's name
- Address of the property you're buying
- Statement of pre-approval/approval
- Loan type and amount
- Interest rate
- Loan term
- Date of commitment
There should also be a disclaimer stating how long the terms of the commitment letter are good for and when it expires. If your lender requires you to pay a fee to move forward with a mortgage acceptance, that should also be detailed in your commitment letter.
Important
Moving from conditional approval to full approval may depend on a range of factors, including the results of the home appraisal.
Clear to Close
Clear to close means you've met all of the lender's requirements to obtain a mortgage and there are no further obstacles barring you from going to closing and purchasing a home. This is one of the last stages of the home-buying process, which often goes like this:
- Get a pre-approval letter from a mortgage lender
- Find a home and make an offer
- Complete a full mortgage application and provide the lender with the required supporting documentation
- Have the home appraised (the lender may arrange for this)
- Arrange for a home inspection and termite inspection if your lender or the locality requires them
- Secure homeowners insurance
- Obtain a firm mortgage commitment letter and clear to close
- Receive a final closing disclosure from the lender
- Complete a final walkthrough of the home
The closing disclosure is a formal document that includes all of the details of your loan. Your lender is required to provide this to you three business days before your closing is scheduled.
Once you have this document, you'll want to review it carefully to verify that all of the information is correct. This three-day window is also an opportunity to ask questions about anything in the disclosure that you don't understand.
The final walkthrough is an opportunity to look at the home once again to check for any issues or verify that necessary repairs have been completed. If you're satisfied that everything in the disclosure is correct and there are no issues with the home, you can move on to closing. At closing, you'll sign the loan paperwork and hand over funds for your down payment and closing costs.
Note
Remember, you're not committed to the loan until you've signed the closing documents.
Mortgage Commitment Letter vs. Clear to Close: Key Differences
A mortgage commitment letter and a clear-to-close serve two different purposes in the home-buying process.
- Mortgage commitment letters signal a lender's intent to loan you money to purchase a home. This can give the seller confidence in your ability to go through with the transaction.
- A mortgage commitment letter may be conditional, meaning that you must meet some additional requirements before you can get a firm guarantee to receive funding.
- Clear to close means you've done everything the lender requires to obtain a mortgage and have been formally approved for financing.
- Until you've been cleared to close, a lender could still decide to deny your application for a mortgage, although the chances of that are exceptionally slim.
In terms of timing, the mortgage commitment letter comes first. You may get an initial prequalification or pre-approval letter before you fully apply for a mortgage, and then a commitment letter after the lender has completed most of the underwriting process. You'll need a mortgage commitment from the lender before you can be cleared to close.
Tip
Consider getting pre-approval quotes from a minimum of three lenders to compare mortgage rates and terms.
Importance of Both Documents
Both a mortgage commitment letter and clear to close are necessary for closing on your new home. The commitment letter shows how much you can borrow if all of the lender's conditions are satisfied.
Clear to close is confirmation that you've met all of those requirements. If there's a critical step you've missed, such as arranging for homeowners insurance or providing all of the income documentation the lender asked for, you won't be able to reach the clear to close stage without checking those items off.
Having a firm mortgage commitment letter in hand can be reassuring since you're more or less guaranteed to get a loan unless there's a drastic change in your situation. For example, losing your job could cause a lender to reevaluate whether you're a good candidate for a mortgage if there's any doubt about your ability to make the monthly payments.
Clear to close can also be a stress reliever, as it means the finish line is near. Again, unless something extreme occurs that directly affects your financial situation or the home you're buying is damaged by fire or a natural disaster, clear to close means there's nothing standing in the way of becoming a homeowner.
Is a Commitment Letter the Same as Pre-Approval?
Commitment letters and pre-approval letters are similar in that they both indicate that a lender is likely to be willing to grant you a loan of a certain amount. A commitment letter, however, particularly a firm one, is closer to a guarantee.
How Long Does It Take From Clear to Close to Actual Closing?
The gap from being cleared to close to the actual closing can take a few days or up to one week. You should receive your closing disclosure within three business days of the scheduled closing date. Keep in mind that even if a lender has fixed a closing date, it's subject to change until it actually happens.
What Happens After You Get a Commitment Letter?
That depends on whether the commitment letter is conditional and requires additional information. If it does, your next step is to supply whatever information the lender requires.
What Is the Fastest You Can Close on a House?
It can take anywhere from 30 to 45 days to close on a home after making an offer and completing a mortgage application. Organizing your paperwork beforehand and responding promptly to requests for documentation or other information from the lender can reduce the possibility of delays.
Is a Commitment Letter Legally Binding?
A mortgage commitment letter may or may not be legally binding on the lender, depending on the wording the lender uses. Conditional commitment letters usually require you to meet additional requirements before you can get a mortgage. If you receive a commitment letter and have questions about its legal status, you may want to consult an attorney.
The Bottom Line
Buying a home is a multi-step process, and it helps to know what to expect. Understanding the difference between a mortgage commitment letter and clear to close can eliminate confusion as you move through the process, from getting pre-approved to signing the closing documents and taking the keys to your new home.
