Mortgage Commitment FAQs
Monday, February 1, 2016
Understanding a Mortgage Commitment: FAQ's
When financing a purchase transaction, the mortgage financing date is the single most important pre-closing event after the Purchase and Sale Agreement is signed.
How Long is the Mortgage Financing Timeline?
The mortgage financing date typically occurs three to four weeks after the P&S is signed. For a condominium purchase, four weeks is recommended.
What is the Purpose of a Mortgage Commitment?
When financing a loan, a lender undertakes a lengthy review of the borrower prior to approving financing. The borrower and the property must meet detailed Fannie Mae guidelines. Thus, a mortgage financing date allows a Purchase and Sale Agreement to be signed before a borrower is approved.
What if a Borrower is Not Approved?
Occasionally, a borrower's financing is not approved. If this occurs, the lender issues a "denial" letter, and provided the request is timely, the borrower is refunded the full P&S deposit (typically 5% of the purchase price in Massachusetts). A skilled loan officer should be able to make an early determination that a borrower is qualified for a loan. Moreover, the process creates an implied incentive to ensure that a borrower is an ideal candidate to receive a loan: the lender, other real estate professionals and seller certainly want to avoid a scenario where a borrower is denied a loan and the transaction is terminated 4-6 weeks into the pendency of a deal.
What Does a Lender's Underwriter Review?
A lender's underwriter engages in a thorough review of the borrower's ability to repay a loan, including reviewing credit, employment, and assets. (Note, if a borrower has commission or bonus based income, it may take longer to analyze).
The lender also reviews the appraisal to ensure the property appraises at or above the purchase price. Finally, if the borrower is purchasing a condominium unit, the lender conducts a detailed condominium project review. The review including ensuring the condominium questionnaire, the condominium documents and financials meet Fannie Mae guidelines.
What if the Lender Does Not Have A Commitment Ready on the Mortgage Financing Date?
On occasion, a commitment can be delayed due to issues beyond a lender's control such as problems with the appraisal process or obtaining and reviewing financials (e.g., bank statements and brokerage accounts). In this scenario, the buyer's attorney will request an extension. A seller is incentivized to grant an extension, because if the seller refuses to extend, they must refund the buyer's full deposit and then put the property back on the market. Thus, the buyer typically can obtain one to two extension(s). However, many deals are on tight timelines, and if a seller is purchasing, they need the certainty of the commitment in a timely manner.
How Should A Borrower Read a Mortgage Commitment?
Once the lender issues the mortgage commitment, it is important for the borrower to thoroughly review the commitment with their loan officer and/or attorney. The commitment will contain a few outstanding conditions. Most are boilerplate that apply to all loans and are easily satisfied in the days prior to closing. They include verification of employment, a final credit check, a final inspection (if new construction), or final review of bank statements.
Conditions that should be "red-flagged" as requiring an additional extension of the mortgage financing date in order to satisfy underwriting guidelines include when a loan is "subject to" an outstanding appraisal condition, a loss of employment, or condominium project approval.
Should A Borrower Show the Commitment to the Listing Agent?
The lender sends the mortgage commitment directly to the borrower. A borrower is not required to disclose their mortgage commitment to any party in the transaction. Often, the commitment contains personal and private information, such as bank accounts, financials and employment. A borrower simply can let the mortgage commitment date pass when proceeding forward. Often, a buyer's agent will verbally notify a listing agent that the borrower has a mortgage commitment.