You’ve been shopping for a new home and finally have your offer to purchase accepted. The next step is to get your mortgage financing in place. You submit your application and required documents through to your bank or broker. Once the lender has reviewed your application, they’ll issue a mortgage commitment confirming your approval.

You’re of course happy to know that your mortgage has been approved! But what exactly does this mean?

There are many that believe that once the lender issues the commitment, then you’re fully approved and that there is nothing to worry about. Everything is locked down!

This is not exactly true however.

 

What Is A Mortgage Commitment?
Once the lender has reviewed your application, they will issue you what’s called a mortgage commitment letter. Or more simply, a ‘commitment’. This is a conditional approval based on the information provided on the application. Let me say that again. It’s based on the information provided on the application. While some basic documentation may be reviewed by the lender at this stage, it’s often issued without any document review at all. The lender will go solely based on the information provided on the application. In most cases, the document review process will not take place until after the lender receives the signed commitment letter back from you.

This why we always ask you for your documents up front with the application. We’ll review them in detail to ensure that everything is solid before we submit your application through to the lender. It’s not uncommon for us to adjust the income that was entered by the applicant at time of application. It can be adjusted in either direction based on the documents provided. For example, did you state that you earn $90,000 per year when it should be $89,000? Or did you state that you earn $120,000 because that was what you earned last year including bonus and commission? Or because this is what you expect to earn this year? These are just some of the things we encounter regularly. This is why we want to ensure everything is accurate before we submit your application through to a lender. We want to ensure that your application is solid so we know that the commitment issued by the lender is as well.

Once the lender has completed the document review process, they will informally advise us that your file is complete. This means that all documents have been accepted and nothing else will be required. This is usually done in the form of a simple email. There is no such thing as a mortgage approval document, nor does anything become firm and binding at that stage. Nothing is 100% carved in stone until you have signed with your lawyer.

 

The Lender Can Cancel Your Approval At Any Time
The lender has the right to revoke the commitment at any time, and they don’t even need to give you a reason why. It doesn’t matter whether you are dealing with a major bank, credit union, or a monoline lender, big or small.

This is also a two-way street. Even if you sign the mortgage commitment, you’re not legally bound by the agreement until you’ve signed with your lawyer. This means, that you are not obligated to close your mortgage with this lender. As you are not obligated, neither is the lender.

 

Don’t Worry!
This sounds scary, but this is not something you need to worry about for the most part.

There are a few reasons why a lender would pull out of the deal prior to closing:

          • They suspect the documents provided were fraudulent
          • The information presented on your application has changed.
          • You accumulate additional debt
          • There is important information not disclosed at the time the commitment was issued

 

Fraudulent documents
Providing that all the documents provided to the lender are legitimate, then you have no need for concern. Mortgage fraud is a major problem in our industry, so lenders will scrutinize your documents to ensure they are legitimate. If they suspect any of your documents have been falsified, then they would revoke your approval immediately, which could be done right up until the day of closing. As long as everything provided is legitimate, then there is no need for any concern.

The information presented on your application has changed
The lender will issue the mortgage commitment based on the information provided. If you make any changes prior to closing, then you’re altering the information that was used to approve you. Your mortgage application will then need to be re-underwritten with the new information, which could potentially change the lender’s decision.

This is most common with a change of employer. It’s always best to hold off on making any employment changes until after your mortgage has closed. If you’re presented with a new opportunity, then make sure run it by your broker before accepting the new offer. They will advise you on your options. It might not make any difference, or it could result in a declined application. It doesn’t matter if you’re making more money or not, so don’t make any assumptions. If you’re considering making any changes, always run them by us first.

If your employment is terminated prior to closing, then the same applies. While this might not be something you have any control over, it still alters the terms in which you were approved under. This is why you want to be confident that your employment is solid prior to committing to purchasing a new home.

You accumulate additional debt
The lender has approved you based on the debt reporting on your credit bureau at the time the application was submitted to them. Just as changing your employer alters the terms in which you were approved, adding additional debt does as well. This includes leasing a car. While not a debt per se, it’s a monthly expense which is viewed the same way. It also doesn’t matter if you have to make payments on it or not. If you are considering taking on additional debt prior to closing, make sure you run in past us first. It’s possible that the lender wouldn’t find out about it, but you’d be surprised what they can find out.

Important information that wasn’t disclosed
It’s always important to be upfront about everything and not try to hold anything back for fear of it affecting your approval. Mortgage lenders are risking several hundred thousand dollars or more, so they are going to do their due diligence. If they were to find out about something that was not disclosed to them, then this could affect the status of your approval. For example, if you tell the lender that you are purchasing the property as your primary residence, but they find out that you’ll be using it as a rental property, then you could end up with a declined application. This is just one example. It’s important to disclose everything to your broker, and not try to keep anything from them. It may not be anything to be concerned about, but you never know unless you discuss it with them first.

 

Conclusion
These situations are rare, but they can and do happen. As long as you keep all of the above in mind during your home buying process, then you shouldn’t have anything to worry about.
Never make any assumptions, and always ensure you get prequalified or preapproved before starting your search for a new home. When you put in an offer, it’s always recommended that you make the offer conditional on financing for five business days. In a hot real estate market however, this may not be an option if multiple offers are expected. Putting in a condition free offer increases your risk, which makes the prequalification process all that more important.