A mortgage commitment letter is a formal document from your lender confirming that your mortgage application has been approved and that the lender intends to fund the loan, subject to any remaining conditions. It is issued after the underwriting process and is tied to a specific property, making it a significantly stronger confirmation than a pre-approval.
In Ontario, the Financial Services Regulatory Authority (FSRAO) describes the commitment letter as the document that initiates the official loan borrowing process. Before receiving the full mortgage contract, you will receive a letter of commitment, also known as an approval letter. It signifies that financing has been officially approved and represents a formal, binding contract between you and the lender once signed. This letter outlines the terms and conditions of the loan and serves as the contract that initiates the official borrowing process.
It is important to understand how this differs from a pre-approval. When a lender pre-approves you for a mortgage, it is not a guarantee that they will enter into a mortgage contract with you. A pre-approval means the lender is interested in offering you a mortgage, and a lender might choose not to offer you the mortgage after closely assessing you or the property. The commitment letter, by contrast, comes after the lender has reviewed the specific property, completed an appraisal, and run your application through underwriting. The commitment letter outlines the details of the approval, including the total loan amount, terms and interest rate. Understanding the difference between pre-qualification and pre-approval can help clarify why this distinction matters.
This distinction carries real consequences for buyers in Ontario. A buyer would be wise not to waive or fulfil a financing condition based on a pre-approval alone. The mortgage approval is not official until a commitment is received that is signed by the lender. If a mortgage broker is involved, be aware that the mortgage broker's signature is not enough to make the mortgage approval official. In practice, this means you should wait for the signed commitment letter before delivering a Notice of Fulfillment (OREA Form 124) on your financing condition.
The commitment letter is based on the information and documentation provided and usually has a set of conditions that must be met in order to move toward closing. For example, it may indicate that it is conditional on your debt servicing ratios or credit score being at or above a certain number. If the lender reviews your credit report and finds a new debt or obligation that was not previously disclosed, or a significant change in your credit score, this may require renegotiation, or the lender could cancel the approval. Common conditions also include proof of insurance, a satisfactory property appraisal, and confirmation of your down payment source.
Read this letter carefully since it will contain information about terms and conditions of the mortgage contract, as well as information about fees and charges payable by you as the borrower. Your real estate lawyer can review it alongside your Agreement of Purchase and Sale to confirm everything aligns before closing.
