Understanding mortage commitments

Sam Schneiderman, Broker-owner of Greater Boston Home Team continues his Monday series:

Last Friday, Rona touched on the risks that buyers take when lenders continue to review the loan documentation after issuing a commitment.

A mortgage “commitment” is a letter from a lender that is supposed to bind them to lend money secured by real estate. Note the word “commitment”. In my opinion, a commitment letter is like a marriage contract. The parties should expect loyalty without any ifs, ands or buts.

There are conditional and “clean” commitments. Simply put, conditional commitments contain clauses that give the lender a way out of funding the loan (a/k/a weasel clauses like “subject to MFHA approval, PMI company approval, or investor funding of the loan…”). “Clean” commitments contain only common conditions (like requiring good title and insurance) that also protect the buyer’s interests.

There is the practice among some lenders to issue conditional mortgage commitments (that they will not update) and continue to request paperwork from the borrower, causing closing delays and putting buyer’s deposits and rate locks at risk. Since few borrowers understand this, thorough buyer’s agents and attorneys monitor mortgage commitment dates and review commitment letters to protect their clients’ deposits. They also know that buyers should work with reputable lenders that adhere to dates and issue clean commitments.

Perspective:
Choose your lender wisely. A low rate is meaningless if the lender can’t or won’t deliver a clean commitment or close on the specified dates. Buyers risk deposits, and sellers can cancel sales when closings don’t happen as scheduled.

Mortgage contingency language should specify that the buyer must receive a “clean commitment”, or buyers could get stuck whatever conditions the lender’s commitment provides.

Buyers that don’t have “clean” commitments by the mortgage contingency date should notify the seller by the deadline and in the manner specified in their Purchase and Sale agreement, or they risk their deposit and may risk loosing the ability to purchase the property.

How would you choose a lender?
Have you been burned by a lender that required additional documents or time after issuing a commitment?
Did your attorney or agent review the commitment letter to see if it really bound the lender, contained weasel clauses or reasons to delay your closing?
Did you learn anything from the process that might help our readers?