You’ve been approved. The lender sends you a mortgage commitment letter. Congratulations—but don’t just sign it and move on.
This document contains critical details about your mortgage, conditions you must meet, and timelines you must follow. Let me show you how to read your commitment letter properly so there are no surprises.
What a Mortgage Commitment Actually Is
A mortgage commitment is the lender’s formal offer to lend you money. It’s a legally binding document (once you accept it) that spells out every term and condition of your mortgage.
Think of it as a contract. The lender commits to providing financing at specific terms if you meet specific conditions. Once you sign it, both sides are bound.
This isn’t a casual document. Read every word. Understand every condition. If anything is unclear or different from what you expected, ask questions before signing.
The Basic Structure
Most commercial mortgage commitments follow a similar format. Understanding the structure helps you navigate them.
Header section: Names the borrower, property address, loan amount, and basic terms.
Term sheet or summary: Lays out the key financial terms—rate, payment, amortization, fees.
Conditions precedent: Lists everything that must happen before the lender will fund the mortgage. This section is critical.
Ongoing covenants: Obligations you must meet throughout the mortgage term.
Legal terms and conditions: Standard legal language about default, remedies, etc.
Acceptance section: Where you sign and date to accept the commitment.
Let’s break down each section.
Reading the Term Sheet
This is the financial heart of the commitment. Verify every number.
Loan amount: Is this what you expected? If you applied for $750,000, does it say $750,000?
Interest rate: Check that the rate matches what you were quoted. Is it fixed or variable? What’s the exact percentage?
Term: How many years is the mortgage agreement? 5 years? 7 years? Confirm it matches your understanding.
Amortization: Over how many years is the payment calculated? 25 years? 20 years? This affects your payment amount.
Payment amount: What’s the monthly (or semi-monthly) payment? Calculate this yourself using a mortgage calculator to verify it’s correct based on the loan amount, rate, and amortization.
Payment frequency: Monthly? Semi-monthly? Bi-weekly? Confirm it works for your cash flow.
LTV (Loan-to-Value): This should match what you discussed. If you expected 70% LTV, does the letter confirm this?
DSCR assumption: Some commitments state what DSCR the lender calculated. Verify their calculation matches yours.
Any discrepancy between the commitment and what you expected needs to be addressed immediately. Don’t sign a commitment with errors.
Understanding Lender Fees
The commitment should detail all fees you’ll pay. Read this section carefully.
Commitment fee: Many lenders charge a non-refundable fee when you accept the commitment, typically 0.25% to 1% of the loan amount. This comes off your down payment at closing.
Underwriting fee or processing fee: Some lenders charge for application processing, typically $500 to $2,500. Check if this was disclosed earlier.
Appraisal fee: You’ll pay for the property appraisal, typically $2,500 to $5,000 for commercial properties. Is this your responsibility or the lender’s?
Legal fees: There will be lender’s legal fees for their lawyer to prepare mortgage documents. These typically range from $1,000 to $3,000. You’ll also have your own lawyer fees, which aren’t included here.
Administration fees: Various small fees for things like title searches, registration, etc.
Add up all fees. Does the total match what you budgeted? Any surprises?
If fees seem excessive or weren’t disclosed earlier, question them. Some are negotiable.
Conditions Precedent: The Critical Section
This section lists everything that must be completed before the lender will advance funds. Miss one condition, and your mortgage won’t fund.
Common conditions include:
Satisfactory appraisal: The property must appraise at or above the purchase price (or the lender’s required value for refinancing). If it appraises low, the lender can reduce the loan amount or cancel the commitment.
Satisfactory environmental assessment: For most commercial properties, the lender orders a Phase I ESA. If it reveals contamination or concerns, the lender may require a Phase II or decline the mortgage.
Title insurance: Clear title insurance must be obtained showing no liens or encumbrances except those approved by the lender.
Property insurance: You must obtain property insurance with the lender named as mortgagee. Coverage must meet minimum amounts specified in the commitment.
Final review of documents: Leases, rent rolls, and financial statements provided at closing must match what you provided with your application.
No material adverse change: The property’s condition, occupancy, and financial performance cannot materially worsen between application and closing.
Assignment of rents: The lender may require an assignment of rents agreement giving them the right to collect rents if you default.
Personal guarantee: Some lenders require personal guarantees from all borrowers. This makes you personally liable if the property doesn’t cover the debt.
Corporate documents: If you’re borrowing through a corporation, you’ll need to provide corporate resolutions, articles of incorporation, and proof of good standing.
Read every condition carefully. Make sure you can satisfy each one. If you have concerns about meeting any condition, raise them immediately.
Timeline and Expiry
Commitments have deadlines. Pay close attention to dates.
Commitment expiry: You must accept (sign) the commitment by this date or it expires. Typically 30 to 60 days from the commitment date.
Conditions deadline: All conditions must be satisfied by this date, usually your anticipated closing date or shortly before.
Funding date: When the mortgage will actually close and funds will be advanced.
Rate hold expiry: If rates are rising, the committed rate is only held until this date. Close late, and rates might increase.
Missing deadlines can mean losing your committed rate, paying extension fees, or even losing the commitment entirely. Mark all dates in your calendar and work backwards to ensure everything gets done on time.
Understanding Interest Rate Details
The rate section should be crystal clear. Make sure you understand exactly what you’re getting.
Fixed vs variable: Is this clearly stated? Double-check it’s what you wanted.
Rate itself: Exact percentage, expressed annually.
Compounding frequency: Usually semi-annual for Canadian mortgages, but confirm.
Conversion options: If it’s variable, can you convert to fixed? When? At what cost?
Rate adjustments: For variable rates, how and when does the rate adjust? What benchmark is it tied to?
Rate lock: Is the rate guaranteed until closing? For how long?
If anything about the rate terms is unclear, get clarification in writing before accepting.
Prepayment Privileges and Penalties
This section explains your flexibility to pay extra or pay off the mortgage early.
Annual prepayment privilege: Can you prepay 10%, 20%, or some other percentage annually without penalty? When does this reset—on the anniversary date, or calendar year?
Lump sum vs increased payments: Can you make lump sum prepayments, or increase regular payments, or both?
Prepayment penalty calculation: How is the penalty calculated if you sell or refinance early? Three months interest? Interest Rate Differential? Be very clear on this.
Portability: Can you transfer this mortgage to a different property if you sell and buy? This can help avoid penalties.
Prepayment penalties on commercial mortgages can be enormous. Understand them thoroughly before committing.
Ongoing Covenants and Obligations
Beyond the conditions you must meet before closing, there are usually ongoing requirements during the mortgage term.
Financial reporting: You might need to provide annual financial statements or rent rolls.
Maintaining DSCR: Some lenders require you to maintain minimum debt service coverage. If DSCR drops below the threshold, you’re in technical default.
Property condition: You must maintain the property in good repair and condition.
Insurance requirements: You must maintain adequate insurance throughout the term.
Payment of taxes: Property taxes must be paid on time.
Restrictions on additional financing: You usually can’t take out second mortgages or liens without lender approval.
Use restrictions: The property must continue to be used as it was when you got the mortgage. You can’t convert an office building to another use without permission.
Violating covenants can trigger default even if you’re making payments. Know what you’re agreeing to.
Default and Remedies
Every commitment includes legal language about what happens if you default.
Default can include:
- Missing mortgage payments
- Failing to pay property taxes
- Letting insurance lapse
- Violating any covenant or condition
- Bankruptcy or insolvency
Remedies the lender can pursue include:
- Accelerating the entire debt (demanding full payment immediately)
- Foreclosure or power of sale proceedings
- Appointing a receiver to collect rents
- Legal action for outstanding amounts
This is standard legal language, but read it. You’re agreeing that if you default, the lender has these remedies.
Representations and Warranties
You’ll make certain representations (statements of fact) and warranties (promises) to the lender.
Common ones include:
- You own or will own the property at closing
- There are no other liens or claims against the property
- You’ve provided accurate financial information
- The property isn’t subject to any legal proceedings
- You’re legally authorized to enter this mortgage
These are important. If any representation is false, it can void the commitment or give the lender grounds to call the mortgage.
If you have any doubts about any representation, disclose the situation to the lender before signing.
Acceptance Process
When you’re ready to accept the commitment, follow the instructions exactly.
Most commitments require:
- Your signature on the acceptance page
- Signatures from all borrowers and guarantors
- Date of acceptance
- Return of the signed copy to the lender by the deadline
Some lenders want original signatures. Others accept scanned copies. Follow their instructions.
Keep a copy of the signed commitment for your records. This is a critical document you’ll refer to throughout your mortgage term.
When to Negotiate or Push Back
Not everything in a commitment is set in stone. If something is problematic, you can sometimes negotiate.
Unreasonable conditions: If a condition seems impossible to meet or unreasonable, discuss it with the lender. Sometimes they’ll modify or remove it.
Excessive fees: Fees larger than discussed or market norms might be negotiable.
Timeline issues: If the deadlines are too tight, ask for extensions before accepting.
Rate errors: If the rate is different from what was quoted, that’s an error to correct, not accept.
You have the most leverage before you sign. Once you accept, you’ve agreed to the terms.
Questions to Ask Your Lawyer
Have your lawyer review the commitment before you sign. They can spot issues you might miss.
Questions to ask:
- Are these terms reasonable and enforceable?
- Are there any unusual or problematic conditions?
- Do I understand my obligations and risks?
- Is anything missing that should be included?
Spending an hour of legal time reviewing the commitment can prevent huge problems later.
Red Flags to Watch For
Certain things in a commitment should raise concerns.
Rate significantly different from quote: If you were quoted 6.25% but the commitment says 6.75%, that’s a major problem.
New fees not previously disclosed: Fees that weren’t mentioned earlier need explanation.
Unrealistic timelines: If you have 10 days to satisfy 15 conditions, that might be impossible.
Conditions that seem impossible: Requiring something you simply can’t provide or do.
Vague language: If conditions or terms are unclear or open to interpretation, get clarification.
Personal guarantee requirements not discussed: If you weren’t told you’d be signing a personal guarantee but now it’s required, that’s a significant change.
Address red flags immediately. Don’t sign a commitment with major concerns.
Comparing Multiple Commitments
If you received commitments from multiple lenders, compare them systematically.
Create a spreadsheet comparing:
- Loan amount
- Interest rate
- Total fees
- Prepayment privileges
- Conditions (complexity and difficulty)
- Timeline
- Ongoing covenants
The cheapest rate isn’t always the best deal. A slightly higher rate with much better prepayment privileges might be worth it. Fewer conditions and easier compliance might offset a small rate difference.
Consider the total package, not just one element.
After Acceptance: What Happens Next
Once you sign and return the commitment, the clock starts on meeting conditions.
Work with your lawyer to:
- Order title insurance
- Arrange property insurance
- Prepare and review legal documents
- Ensure all lender conditions will be satisfied
Stay in close contact with the lender. If any issues arise meeting conditions, communicate immediately. Problems that surface at the last minute can derail closings.
Your Commitment Reading Checklist
Before signing any commitment:
- Verify loan amount, rate, term, and amortization match expectations
- Check all fees against what was disclosed earlier
- Read every condition and confirm you can meet them
- Understand prepayment penalties and privileges
- Note all deadlines and ensure you can meet them
- Review ongoing covenants and obligations
- Have your lawyer review the commitment
- Get clarification on anything unclear
- Compare with any other commitments you received
Only sign when you’re completely comfortable with all terms.
Moving Forward
Your mortgage commitment is a critical document that governs your financing for years. Taking time to read and understand it thoroughly protects you from surprises and problems.
Most commitments are straightforward and fair. But errors happen, and terms can vary significantly between lenders. Your job is to read carefully, understand completely, and question anything that’s unclear or problematic.
At Creek Road Financial Inc., we review commitment letters with our clients before they sign. We help identify any issues, explain terms, and ensure you understand what you’re agreeing to. We can also help negotiate if terms aren’t what you expected.
A mortgage commitment isn’t just paperwork to sign quickly so you can close. It’s a binding agreement that deserves your careful attention. Read it properly, and you’ll avoid surprises and problems down the road.