Commitment Letter

What is a Commitment Letter?

A commitment letter is an official document issued by a lender to a borrower after the approval of a loan application. This letter serves as a formal notification that the loan has been approved and provides detailed information about the loan terms and conditions. It represents a binding promise from the lender to proceed with the loan under the specified terms.

Example

When Standard Mortgage Company completed the loan approval process, they sent Collins a commitment letter to inform her of the results. The letter then became a binding promise of Standard’s intention to grant Collins the loan at the terms stated.

Frequently Asked Questions

Q: What information is typically included in a commitment letter?

A: A commitment letter generally includes the loan amount, interest rate, repayment schedule, loan type, any conditions that must be met before closing, and the validity period of the commitment.

Q: Is a commitment letter legally binding?

A: Yes, a commitment letter is legally binding. Once issued, it indicates that the lender has agreed to provide a loan under the terms specified, provided that all conditions are met.

Q: How does a commitment letter differ from a pre-approval letter?

A: A pre-approval letter indicates that a lender has assessed a borrower’s financial situation and is willing to lend up to a certain amount. However, it is not a final approval. A commitment letter formally confirms that the loan is approved and specifies detailed terms and conditions.

Q: What happens if the conditions in the commitment letter are not met?

A: If the conditions outlined in the commitment letter are not satisfied by the borrower, the lender may withdraw the loan offer, rendering the commitment letter null and void.

Q: How long is a commitment letter valid?

A: The validity period of a commitment letter can vary but typically ranges from 30 to 60 days. It will state a specific expiration date within the document.

Pre-Approval Letter: A document issued by a lender indicating preliminary approval based on initial credit information and specified conditions.
Loan Agreement: A formal contract between a borrower and lender detailing the specific terms and agreements of a loan.
Underwriting: The process lenders use to evaluate the creditworthiness of a borrower and to assess the risks involved in issuing a loan.
Mortgage Commitment: A commitment specifically related to mortgage loans, indicating official approval and binding terms for home financing.
Credit Report: A detailed report of an individual’s credit history used by lenders to determine creditworthiness.
Closing Disclosure: A document provided to borrowers three days before closing, detailing the final terms and costs associated with the loan.

Online Resources

References

“The Complete Guide to Understanding Commitments by Lenders,” Mortgage News Daily. Accessed Month, 2023. URL
“Commitment Letter Explanation and How It Works,” Bankrate. Accessed Month, 2023. URL
U.S. Department of Housing and Urban Development. “HUD Handbook 4000.1 Single Family Housing Policy Handbook.” Accessed Month, 2023. URL
Investopedia, “Commitment Letter”. URL

Suggested Books for Further Studies

Garanimals, “Real Estate Finance and Investments” – A comprehensive guide exploring various financial instruments used in real estate.
Peter Conti and David Finkel, “The Real Estate Wholesaling Bible” – A deep dive into wholesaling strategies and real estate financials.
Frank Gallinelli, “What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures” – Insights into the financial metrics critical for real estate success.

Real Estate Basics: Commitment Letter Fundamentals Quiz

### What is a commitment letter? - [ ] A pre-qualification notice. - [x] An official notification of loan approval. - [ ] A general intent to lend money. - [ ] An informal correspondence between lender and borrower. > **Explanation:** A commitment letter is an official notification from a lender to a borrower, indicating that the loan application has been approved and detailing the terms of the loan. ### Is a commitment letter legally binding? - [x] Yes - [ ] No - [ ] Only under certain conditions - [ ] Only after the loan is disbursed > **Explanation:** A commitment letter is a legally binding document once issued, indicating that the lender has accepted to provide the loan under the specified terms provided all conditions are met. ### What key document is often confused with a commitment letter? - [x] A pre-approval letter - [ ] A credit statement - [ ] An income verification - [ ] A title insurance policy > **Explanation:** A pre-approval letter is often mistaken for a commitment letter, but they serve different purposes. A pre-approval letter shows preliminary approval, while a commitment letter confirms the loan approval and terms. ### How long is a commitment letter typically valid? - [ ] 365 days - [ ] 90 days - [x] 30 to 60 days - [ ] 100 days > **Explanation:** The validity period for a commitment letter generally ranges between 30 to 60 days, specifying a timeframe within which the borrower must fulfill terms. ### What does a commitment letter typically include? - [ ] General lending guidelines - [ ] Property details alone - [x] Loan amount, interest rate, and repayment terms - [ ] Borrower's detailed employment history > **Explanation:** A commitment letter typically includes detailed loan terms like the amount, interest rate, repayment schedule, and any conditions to meet before loan disbursement. ### If the borrower fails to meet the conditions in a commitment letter, what happens? - [x] The lender may rescind the commitment. - [ ] The loan terms remain unchanged. - [ ] The interest rate automatically increases. - [ ] The borrower receives an extension. > **Explanation:** If the borrower does not meet the specified conditions in the commitment letter, the lender may cancel the commitment. ### What is usually the next step after receiving a commitment letter? - [ ] Reapplying for a loan - [ ] Purchasing mortgage insurance - [x] Proceeding with the loan closing - [ ] Issuing a general waiver > **Explanation:** After receiving a commitment letter, the next typical step is to proceed with the final loan closing process. ### Who issues a commitment letter? - [x] The lending institution - [ ] The borrower’s employer - [ ] The insurance company - [ ] The housing authority > **Explanation:** A commitment letter is issued by the loan officer or lending institution as an official communication to the borrower. ### In addition to loan terms, what might a commitment letter specify before closing? - [x] Conditions to be met - [ ] Future property assessments - [ ] Obligatory insurance premiums - [ ] Legal proceedings > **Explanation:** Besides loan terms, a commitment letter will specify any conditions the borrower must meet prior to closing the loan. ### What major topic is covered by a ‘Closing Disclosure’ which is somewhat related to a commitment letter? - [x] Detailed loan and cost information - [ ] Future interest rate trends - [ ] Loan policy changes - [ ] Borrower's credit history > **Explanation:** A Closing Disclosure provides detailed loan and cost information to homebuyers, similar to how a commitment letter details loan terms but in a different stage of the process.

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