Once the lender has received your initial application, and before they verify your income and down payment by way of the documents you will also be submitting, you will receive a commitment.
Before issuing the commitment, the lender will have looked at all the specifics regarding your application and your credit bureau, and will have decided that it is a file they would like to fund. The commitment will also be accompanied by a list of conditions to be satisfied before the lender will fund the mortgage.
Essentially at this point, the lender is committing to funding your request contingent upon the specified conditions being met. These conditions can include, but are not limited to, the following: -Verification of income by way of supporting documents -Verification of down payment by way of supporting documents -Receipt of signed mortgage commitment -Receipt of the purchase agreement and MLS listing -Subject to satisfactory appraisal supporting purchase price -Statements from a bank account showing enough to cover closing costs of the transaction, usually 1.5% of purchase price In the list of conditions there will also be items tasked to your lawyer, termed "solicitor conditions". This may include providing a status certificate and confirmation of common expenses (if you are purchasing a condo or condo-town), title insurance, up to date property taxes, and identity verification. In most cases, the borrower will also have an opportunity to choose which payment frequency they prefer when completing the commitment. There are a few important terms to be aware of that may be featured in the commitment, and can be advantageous depending on your situation.
Property Taxes Most lenders give the option to pay the property taxes yourself, or to have the lender pay them for you. If you opt to have the lender pay your property taxes, it is important to note that you are not borrowing this money. Your monthly property tax payment is instead added to your mortgage payment and withdrawn from the same account in one sum. This is an easy way for you to stay on top of your property tax payments, and a way for the lender to ensure that you are keeping up to date on these as well.
In most cases property taxes, when paid by the lender, are withdrawn from your account along with your mortgage payment at 1.5x the actual required monthly payment. This is so that the lender can build up a reserve in your property tax account, and when it comes time for a lump sum payment to be made to the municipality, there are enough funds in the account that you do not go into a deficit and are charged interest on the funds owed. After 12 months of 1.5x property tax payments, a balance is usually achieved between funds in the account and amount needed to pay the municipality, so withdrawals are reduced to the normal monthly amount.
Pre-Payment Privileges and Penalties Most lenders will have a section on the commitment outlining their terms for pre-payment. This can include adding lump sum payments on an irregular basis, or changing the amount in your payment frequency. Pre-payment is useful when the borrower may be expecting an influx of funds in the near future, or if paying down the mortgage as quickly as possible is a priority. Make sure to read this section carefully to ensure there are no penalties associated with the lender's pre-payment terms. Note: mono-line lenders are usually more lenient here than big banks. Along with the commitment, your mortgage broker will include a set of broker documents for you to sign. These documents will include the Disclosure to Borrower, Consent Form, Amortization Schedule, and Creditor Insurance Form. Usually these do not have to be submitted to the lender, but are used as part of a compliance package assembled by your mortgage broker for their own regulation purposes.
Disclosure to Borrower The Disclosure to Borrower is a document that details the mortgage and the cost of borrowing associated with it. This includes mortgage amount, interest rate, total interest to be paid, amortization, first payment date, and the total cost of borrowing over the term of the mortgage. This document will also outline any applicable fees, and may include an estimate for the cost of an appraisal and legal fees as well.
Consent Form The Consent Form is basically a legal document wherein the borrower gives consent to the mortgage broker's firm to use your personal information for application and insurance purposes, and to access your credit bureau.
Amortization Schedule This document shows some important information pertaining to your payments and how they are broken down over the course of the mortgage term. At the top it will outline the mortgage amount, term length, amortization and payment frequency, as well as your first payment date and date of maturity among other things. In addition, the Amortization Schedule will also tell you the sum of your total payments, total interest, and total principal that will be paid over the course of the term, as well as the balance remaining at maturity. The document then goes on to list every payment that will be made, and how much of that is put towards principal and how much towards interest.
Creditor Insurance Form
The last document that usually accompanies the commitment and the broker package is the Creditor Insurance Form. This document details an insurance policy that is available to you at the time of signing that will cover your entire mortgage amount in the form of a payout in the case of death, disability or critical illness of the borrower. There is usually a brief health questionnaire on the form, and your monthly insurance premium will be listed. You must sign this document regardless of whether you choose to accept or waive the coverage.
It is important to note that:
-In the event that a claim is made, the application is underwritten at the time of claim - this means that if you were in good health when you initially applied but became sick before the time of claim, it may be rejected.
-The deductible (amount to be paid out) decreases along with the mortgage amount - this means you will only ever be covered for the mortgage amount at time of claim, not the mortgage amount when you initially applied
It is highly advisable that you meet with an insurance professional during this period in order to arrange for the appropriate coverage for you and your family. This way you can be fully informed and protect what is most important to you using the most appropriate insurance products that are available.