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A mortgage commitment letter establishes the official approval of your mortgage loan. This letter contains the terms of the mortgage loan and the conditions you have to fulfill to get the loan funded.
This letter confirms the lender’s “conditional willingness” to finance your mortgage transaction.
Conditional because there are list conditions like confirming income, which you must fulfill to get the loan funded.
Regardless of the mortgage transaction type (house purchase or mortgage refinance), a mortgage commitment letter generally signifies the official approval of your request for a home loan.
There is no universal format for a mortgage commitment letter.
A mortgage commitment letter outlines the loan terms and all the conditions you need to satisfy to get the money.
In general, the letter will contain the following;
A mortgage commitment letter can be issued by anyone or any institution capable of financing the purchase or refinance of your property. The institution or the individual that finances your mortgage loan is called a lender.
The lender can be a traditional bank, insurance company, credit union, mono-bank, mortgage trust company, or even your friend and family member.
The standard process of getting a mortgage commitment letter starts with you submitting an official mortgage application to the lender.
The lender will review your application for approval by assessing your capability and willingness to make the required monthly payments and repay the mortgage loan when it comes due.
To confirm that you can make the monthly payments, the lender will review your income, considering the monthly payment for the requested mortgage loan and your other debts.
The lender will review your credit report, considering your credit score and how you have paid your other debts to assess your willingness to repay the mortgage loan.
Suppose your application checked all the boxes:
The lender will go ahead and approve your mortgage application and issue you the mortgage commitment letter.
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An essential aspect of the mortgage commitment letter is the conditions you have to fulfill to get the money.
These conditions can vary by the type of mortgage loan you are applying for, the loan amount, the lender, and even the type of property you want to finance. However, some of the most common conditions you should expect to see in your commitment letter are:
How long it takes to get a commitment letter depends on the lender and the packaging of your mortgage application. It can take anywhere from a few hours to weeks.
Notwithstanding, lenders often prioritize mortgage applications for house purchases over a similar application for mortgage refinances or renewals.
House purchase offers are always time-bound. Purchase agreements usually state the maximum number of days the seller is willing to hold on to the listing for you to secure your mortgage financing.
If you are buying a house, speak to your preferred lender before you submit your mortgage application. The lender should advise you if it cannot review your application within the financing confirmation timeframe.
Knowing this beforehand will help keep you from losing out on your dream home.
It’s not only your grocery items that expire; your mortgage commitment letter does expire if you do not accept the approval or fulfill the funding conditions within the timeframe stated in the approval.
Why do they expire?
Your income and credit situation changes. Our income and credit circumstances will change roughly every three months. You might get a new job, improve your credit rating, or get a promotion at work.
Generally, the house prices will change, the interest rates may have changed, inflation may have kicked in, and so on.
Lenders need the most up-to-date information about you when funding the mortgage loan. That explains why the commitment letter will expire after a specific timeframe.
Also, commitment letters can expire because you either have not taken any action since the lender issued it, which is usually 10 days; or you have not been able to fulfill all the funding conditions by a specific date, which is generally 90 days from the day you accept the approval.
Expiration does not necessarily mean losing your approval.
The lender needs to re-evaluate your file for any changes in your situation, like your income, credit score, employment, and liabilities.
Advise your lender;
For the 90 days, the lender will request updated income documents – employment letters and paystub copies- to confirm your employment status and income. Also, they will check your updated credit record to revalidate your character.
For the 10-day window, the lender may extend it or revisit your mortgage rate if it is required to be priced to the market rate.
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Yes, the lender can still decline your mortgage loan even after issuing you a commitment letter.
As explained above, a commitment letter intends to finance your mortgage transaction. The approval and commitment letter will be voided if you fail to fulfill the funding conditions.
Also, your commitment letter can be withdrawn if your income and credit situation changes adversely during the funding conditions review process.
As part of the funding condition validation process, the lender reviews your submitted documents to confirm the information presented in the application. As part of that review, the approval criteria will be re-assessed with new information from your submitted documents. The debt service ratios will be re-calculated and risk re-evaluated. The approval will be voided if your debt service ratios exceed acceptable ranges.
Yes, you can. Not every mortgage loan requires an appraisal report to complete the underwriting. Also, technology has enabled lenders to assess the value of your property even without an appraisal report.
There are third-party applications that some lenders do subscribe to. These applications gather property value data, making it easy and fast for lenders to validate the value of your property.
The lender may require you to get an appraisal report if the value you provide for the property is outside the range of the value reported in this third-party application.