You've found your dream home. There's one problem: Your monthly household income isn't high enough.
Your Commitment Letter: Firm or Conditional?
Knowing whether your commitment letter is firm or conditional can spare you from some ugly surprises.
Loan commitment letters can be like handshakes: some are firm, and some are mighty soft. If you're preparing to fund a mortgage loan, you'll need to know which type of commitment you have, and how it affects your home purchase transaction.
Firm commitment lending means business
A firm loan commitment is a lender's unqualified promise to provide you with a stated amount of debt under specified terms. The firm commitment letter has an end-date; if you don't fund the loan within that period, the offer expires, and the lender may charge you for the cancellation. Once that commitment expires, all bets are off. If you still want the loan, you need to re-apply. And it's likely that the new loan will look different from the old one, particularly with respect to the interest rate.
Home sellers prefer to entertain offers from buyers who have a firm loan commitment. Because you and your lender are motivated to close on the firm commitment, it adds another layer of assurance for the seller that the deal will actually go through.
Conditional commitment problematic
A conditional commitment letter states that a lender will offer the loan as long as certain conditions are fulfilled. Loans are always conditional in the early stages, but the conditions are cleared progressively as the loan moves through underwriting and processing. Conditional commitments are problematic when the requirements aren't met in a timely manner. Ultimately, this can lengthen escrow, or even cause a sale transaction to fall through.
In some states, language on the sale documentation specifically limits your rights if there are conditions on your loan commitment. The seller may be able to declare that you're in default of the agreement, for example, if you don't properly disclose the specifics of the conditional financing. When you're in default, you stand to lose your deposit and other out-of-pocket expenses.
Handling your loan commitment
First, review your commitment letter and decide if you have a firm or conditional commitment. If it's firm, you can focus your attention on other aspects of your transaction. If it's conditional, request a list of conditions and do what you can to fulfill them.
The conditions you can't control are those related to the appraisal. Lenders today are extremely cautious about the amount that they'll lend relative to the home's value. It's possible to see that the appraisal is subject to underwriting review-which means that the lender can override the appraised value. If you see this condition, open the discussion with your lender immediately. You'll want to know how and why this override would be enforced.
Ideally, you should present your purchase offer with a firm handshake, not a flimsy one. If that's not possible, take action to firm up that handshake as soon as you can.
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