A loan approval or commitment is a promise made by a mortgage lender to a homebuyer to provide the buyer with a mortgage loan for a home purchase. After a prospective buyer has completed a loan application and the lender deems them creditworthy, the lender gives the buyer a written loan approval or commitment.
It describes all of the major terms and conditions of the loan agreement, such as the loan amount, the interest rate, the life of the loan, and the fees and charges that have to be paid when the loan is concluded.
Does It Make a Difference If a Loan Approval/Commitment Is in Writing?
Written loan approvals or commitments may not be required by law in all cases. They are, however, highly desirable for the buyer/borrower, because without a written commitment, sellers would probably not accept the buyer’s offer on a property. Perhaps more importantly, nobody would be able to prove what the original terms of the loan were, if the bank decides to renege on the terms and conditions, e.g. by demanding a higher rate of interest. So, a borrower always wants to have the loan approval in writing.
If a lender does not provide a written loan approval, a buyer/borrower should ask for one. If a lender refuses to provide written confirmation of the loan terms early in the process, it is probably a good idea to continue shopping around for a lender who is willing to provide documentation. It should be a warning sign. Also, a buyer/borrower should expect a lender to request the documentation from the buyer/borrower that is necessary for a genuine loan decision.
Sellers also want to look for a genuine loan approval letter as part of any offer to buy that is made. If there is not a genuine approval document, as opposed to an opinion letter, then the seller runs the risk of accepting an offer that cannot succeed in the end. This is because the buyer would not be able to get a mortgage loan and come up with the funds to complete the purchase.
What Should I Look For in My Loan Approval/Commitment?
Experts recommend that a borrower should make sure the pre-approval or approval document they receive represents the results of a true loan approval process and not just a conversation with a lender’s loan officer. Bank or credit union loan officers often take verbal loan applications. They then obtain the borrower’s credit report and, on that basis only, write a pre-approval letter.
They probably have not collected the extensive documentation that is required for a true loan approval. And they may not even be authorized to refer an application to the loan underwriters who are the true decision-makers in the lending organization. .
Some loan officers do not have the underwriting authority to approve loans, but they distribute letters to borrowers that contain the word “approval” on them. They are not, in fact, approval letters, but only opinion letters. This means that in the loan officer’s opinion, the borrower would qualify for a loan on the terms and conditions identified, but only after going through a true loan approval process.
People in the market for a mortgage loan to fund the purchase of residential real property should know about the “Secure and Fair Enforcement for Mortgage Licensing Act of 2008” (SAFE Act). This federal law established a nationwide licensing and registration system for residential mortgage loan originators (MLOs). The SAFE Act prohibits anyone from engaging in the business of a residential mortgage loan originator without first obtaining and then maintaining on an annual basis either:
- For employees of financial institutions covered by the law, registration as an MLO. Also, the employee would need a unique identification number, also referred to as “federal registration”: or
- For all other people who operate as mortgage lenders, a state license and registration as a state-licensed MLO. These people must also obtain a unique identification number from the state in which they operate.
The SAFE Act requires that registration of those who are registered through both the federal and state systems be done through the same online registration system, the Nationwide Mortgage Licensing System and Registry (NMLSR).
One advantage of the single, nationwide registration system is that buyers have easy access to information about the registration of MLOs at no cost. They can view the registry and see the employment history of an MLO. They can also find out whether any disciplinary or enforcement actions have been taken against MLOs. So, in other words, they can investigate the MLO with whom they are dealing and ensure that they are registered and have no history of bad acts.
When taking financial advice from a person, it is reasonable to want them to be licensed and have the know-how and understanding of legal requirements in this area. Every state has its own requirements for mortgage loan officers and brokers, although they are likely to be similar. Licensing by a state is required for a person to originate mortgages. These include certifications or licenses that an individual loan officer must have as well as licenses that must be maintained by the institution funding the loan
A buyer may be more likely to get a genuine pre-approval letter before making an offer on a residential real property from a mortgage broker than a lender. A buyer/borrower can tell if their application has gone through the necessary underwriting phase of the loan approval process, if they have submitted the documents required for a genuine approval. That would mean submitting such items as W-2s, tax returns, other proof of income, proof of assets, proof of having the funds for a down-payment.
A buyer should ask if their application has been submitted to underwriting and if the loan approval can be provided in a written document that states all of the terms and conditions of the loan. A phone call from a lender’s loan officer to a realtor who is submitting the buyer’s contract for acceptance by the seller with a verbal pre-approval after a short period of time and without documentation changing hands is not providing a genuine loan approval or pre-approval.
The type of loan approval that a buyer/borrower wants is one from a licensed MLO, that has been submitted to the lender with the required supporting documents. A licensed mortgage broker is legally prohibited from issuing pre-approved or approved loans, if they have not submitted an application to a lender first and received an approval from them.
If a person receives a final loan offer that includes parts that are unexpected or difficult to understand, the person should ask the lender what it means and why it is included in the offer. And, finally, a person should understand that because a bank provides them with a loan commitment does not mean they must accept the loan and sign loan documents. A person can still reject any loan offer and a bank can never force a person to borrow their money. Every buyer/borrower wants to analyze a loan offer and decide whether the terms and conditions work for them and their financial situation.
When Will I First See This Document?
A buyer/borrower should receive a mortgage loan approval (or pre-approval) document within a reasonable amount of time before being asked to sign final loan documents. This gives them an opportunity to review the document and decide if they really want the loan and to catch any mistakes the document might contain. Always insist on a written loan approval or commitment and store it in a safe place.
If a person does not feel competent to review technical documentation in connection with buying a house, then they may want to consult a real estate attorney for their guidance. A mortgage loan contract contains much technical terminology, e.g. prepayment penalty or a provision against assumption, that they do not really understand. An attorney can help explain the practical meaning of this technical terminology.
Do I Need an Attorney?
Dealing with important economic decisions, such as buying a house with a mortgage loan, is often confusing and stressful. If a person is unsure of their ability to read and assess the technical documentation involved, consulting an experienced mortgage attorney for advice can help. Your attorney always represents your interests and acts to protect you.