What is a mortgage commitment letter?

Alright, let's get real for a second. Buying a house is a big deal. It's not like going to the grocery store and picking out a carton of eggs–it's a huge commitment, and you want to make sure you're making the right choice. That's why getting a mortgage commitment letter in Canada is so important.

What is a mortgage commitment letter?

A mortgage commitment letter is a document that outlines the terms and conditions of a mortgage loan. It's a written agreement between you (the borrower) and the lender that says they'll give you a certain amount of money to buy a home. 

Why is it important?

When you're buying a home, you'll likely need a mortgage to pay for it. Unless you have a ton of cash lying around (in which case, can we be friends?), you'll need to borrow money from a lender. But lenders aren't just going to hand over a bunch of cash without any assurance that you're going to pay it back. That's where the mortgage commitment letter comes in. 

It shows the lender that you're serious about buying a home, and that you've met the conditions necessary to secure the loan. Think of it as a stamp of approval, saying, "This person is a good investment."

Types of Mortgage Commitment Letters

1. Conditional Mortgage Commitment

A conditional mortgage commitment letter is the more common type you'll encounter. It indicates that you've been preapproved for a loan. This letter typically includes:

• Name of Lender and Borrower: Identifies the parties involved in the mortgage agreement.
• Statement of Preapproval: Confirms that the borrower has been preapproved for a mortgage.
• Loan Type: Specifies the type of loan (e.g., fixed-rate, adjustable-rate).
• Preapproved Loan Amount: The maximum amount the lender is willing to lend.
• Conditions for Loan Approval: Lists the requirements that must be met for the loan to be finalized. These can include property appraisal, home inspection outcomes, no significant changes in the borrower's financial situation, proof of home insurance, and resolution of any title issues.
• Validity Period: The duration for which the preapproval is valid.

The conditional commitment letter doesn't guarantee the loan; it signifies the lender's intent to finance your home purchase if certain conditions are met.

2. Firm Mortgage Commitment

A firm mortgage commitment letter is a more definitive promise from the lender. It's usually issued later in the home-buying process after you've found a home and signed a purchase agreement. This letter is an indication that you've formally applied for the loan and the lender is ready to finance your purchase. Key elements of this letter include:

Both types of letters have expiration dates, emphasizing the time-sensitive nature of mortgage commitments. The firm commitment is closer to a final loan approval but still subject to certain conditions and verifications.

Next Steps After Receiving a Mortgage Commitment Letter

After receiving either type of mortgage commitment letter, it's crucial to:

• Fulfill All Conditions: Ensure all lender requirements are met.
• Stay Financially Stable: Avoid making significant financial changes that could affect your loan approval.
• Communicate with Your Lender: Keep in touch with your lender for any additional documentation or information needed.
• Use the Commitment to Your Advantage: Show the commitment letter to sellers to strengthen your buying position.

What's included in a mortgage commitment letter?

When it comes to your mortgage commitment letter, some things to expect outlined on the document are:

1. Loan amount: This is the amount of money the lender is willing to lend you.
2. Interest rate: This is the rate at which you'll be charged interest on your mortgage loan.
3. Annual percentage rate (APR): Some lenders will also highlight the costs of your mortgage including interest rates, as well as any other fees like closing costs or broker fees
4. Mortgage term: This is the length of time that you'll have to repay the loan with the mortgage terms that you agreed upon–generally five years.
5. Amortization period: This period is the length of time over which the loan will be repaid in full, usually around 25 years, but it could go as high as 30  years. 
6. Payment frequency: This is how often you'll make your mortgage payments (e.g. weekly, bi-weekly, monthly).
7. Prepayment privileges: This outlines any options you have for paying off your mortgage early, such as lump sum payments or increasing your regular payment amount. This could also include your prepayment penalties, for potentially paying off your mortgage too fast. 
8. Closing date: This is the date on which you'll take possession of the property and the mortgage will be funded.
9. Conditions: This section outlines any conditions you need to meet before the lender will fund the mortgage. For example, you may need to provide proof of income or proof of home insurance.

Overall, a mortgage commitment letter is an important document that spells out the terms of your mortgage loan, so it's important to review it carefully and make sure you understand everything before signing on the dotted line.

How do you get a mortgage commitment letter?

To get a mortgage commitment letter, you'll need to apply for a mortgage with a lender. They'll review your financial information, including your credit score, income, and debt ratios, to determine whether you're eligible for a loan. If you're approved, the lender will issue a mortgage commitment letter, which will outline the terms of the loan. You'll need to sign the letter and return it to the lender, along with any other required documentation.

What happens after you get a mortgage commitment letter?

Once you have a mortgage commitment letter, you can start shopping for homes. When you find a property you want to buy, you'll make an offer to the seller. If your offer is accepted, you'll need to provide the mortgage commitment letter to the seller as proof that you can afford to buy the home. From there, you'll work with your lender to complete the mortgage application process and get the loan funded. It's important to stay in communication with your lender throughout the process, so they can let you know if any additional documentation or information is needed.

Your lender will also want you to sign the mortgage commitment letter to lock in the interest rate and size of the mortgage offered. This will help them to ensure that you can close your mortgage on time and to have the necessary resources in place for the fulfillment process.

What happens after signing your commitment letter?

After signing your commitment letter, you'll be moved officially to the fulfillment process. In the fulfillment process, you'll be asked to upload more documentation to verify your income, gift for downpayment and other critical aspects of your mortgage application. This is done during fulfillment to expedite the process for you to get your commitment letter as fast as possible and to be able to shop for homes in a reasonable amount of time. During the fulfillment stage, you will be asked to complete all the necessary conditions within your commitment letter. A fulfillment specialist will usually be in contact to help you along in the process.

Once all documentation has been provided and all conditions fulfilled, you'll be ready to fund your mortgage. At this point, the process is paused until your home is ready to close. There is also a separate closing process that occurs near your closing date. This will involve your lawyers and the lender's lawyers and any payout statements that your current mortgage lender needs to provide.

If you're in the market for a new home, it helps to talk to a lender and get a mortgage commitment letter before you start shopping. It's an important part of the home buying process because it gives you an idea of how much you can afford to spend. Having a mortgage commitment letter can also help you close on a home faster since you'll have already gone through the underwriting process and met the lender's conditions.

Remember, buying a home is a big decision, and it's important to have all the information you need to make an informed choice. If you need any help in the process or are looking to kickstart your home buying journey, fill in Pine’s quick and easy application and we’ll connect you with one of our experienced agents to get you started.