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What is a Commitment Letter?

When a potential borrower's loan has been approved, they receive a commitment letter from the lending institution.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 July 2014
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Commitment letters are formal and legally binding documents that are issued by a lender to a loan applicant. The text of the commitment lender contains an offer to extend a loan to the applicant. Within the content of the letter, the exact terms and conditions involved with the loan commitment are specified.

The main purpose of the commitment letter is to inform the borrower that the loan has been approved, as long as certain conditions are met. Known as an Offer of Advance in some parts of the world, the letter in a sense serves as a cover letter to the actual contract that will be signed by both the lender and the borrower. While the format may vary slightly, most lenders prefer to include the commitment letter along with the formal agreement.

Within the text of the letter, the lender will include specifics that are important for the applicant to study closely. The total amount of the loan is included, along with a breakdown of the interest rate that will be applied. Often, the number of installment payments is noted, along with the amount of each installment. The commitment letter may also touch on such matters as any penalties that apply if the loan is paid off in advance, or actions that the lender may take if the loan falls into arrears for some reason.

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Receiving a commitment letter does not place the applicant under any obligation to pursue the loan through that particular lender. In the event that the applicant has approached several different lending institutions, it is possible that he or she may receive commitment letters reflecting several different loan commitments. When this is the case, the applicant can simply notify the issuing institution that he or she has chosen to accept the loan offer of another lender. Generally, this should be done with a formal reply. The borrower should also return the commitment letter and any enclosed paperwork at the same time.

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Discuss this Article

mutsy
Post 4

Latte31 -I think that the appraisal is a large sticking point with a lot of banks because it is hard to determine the true value of the property in these markets.

Usually foreclosures were not included in appraisal figures, but when about 30% of all homes on the market are foreclosures they have to take these sales figures into consideration when pricing a home.

latte31
Post 3

Oasis11 - I wanted to add that all banks have stipulations regarding appraisals, and the percentage of owner occupants when buying a condo.

The interest rate with the bank can be floating or lock in depending on what you preferred. With the high rate of foreclosures, buying a condo can pose some problems if the building has a high number of foreclosures.

I was prequalified for my loan, but the property I was buying did not match the appraisal. In another instance the condo I was buying was in a building that was in a resort area and had a lot of renters.

This is also another factor regarding the possibility of obtaining financing. Because the building was less than 50% owner occupants, the bank would not finance. They also look at the condo documents to view the financial health of the association. I finally got the condo that I wanted but it was a lot of work.

oasis11
Post 2

Watson42- I have to say that in my experience a bank commitment letter is nothing more than a prequalification notice to let you and the sellers know that they have approved you for financing under certain conditions.

For example, when my husband and I were looking for a vacation property, we got prequalified with Bank of America.

They offered us bank commitment letter after we were approved as potential borrowers. This mortgage loan commitment letter from them had an expiration date of ninety days so beyond that timeframe we would have to reapply.

They let us know that the financing was subject to a home inspection and an appraisal.

watson42
Post 1

If you keep a loan commitment letter that you do not plan on using, it can cause problems. Like pay stubs left lying around or lost credit card applications, it could be used for theft of identity information. Also, if you forgot to reply to that lender, that company might still assume you want their loan, leading to anything from a little confusion to fees or legal action later on.

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