Definition
Loan Commitment
A loan commitment is a formal agreement between a financial institution and a borrower that stipulates the provision of a loan on specified terms and conditions. The commitment often details the loan amount, interest rate, and the duration for which the offer is valid. This arrangement can be crucial in various real estate contexts, such as construction and development, where funding certainty is essential for the smooth execution of projects.
Examples
- Construction Loan Commitment: Abel obtained a loan commitment from a construction lender before starting his project. This guaranteed him the necessary funds to complete the construction.
- Permanent Mortgage Commitment: Alongside the construction loan, Abel also secured a takeout financing commitment for a permanent mortgage, ensuring long-term funding once the construction was completed.
Frequently Asked Questions
What is a Loan Commitment in real estate?
A loan commitment in real estate is an agreement by a lender to extend a specified amount of credit to a borrower under agreed-upon terms at a future date, often used to secure construction or development projects.
How does a Loan Commitment benefit borrowers?
Borrowers benefit from loan commitments as they provide a guaranteed source of funding, specify loan terms, and often lock in interest rates, which helps in financial planning and ensuring the project’s feasibility.
What are the types of Loan Commitments?
There are primarily two types of loan commitments:
- Revolving Loan Commitment: Allows the borrower to draw, repay, and redraw funds up to a specified limit.
- Non-Revolving Loan Commitment: Disburses funds in a lump sum or set installments and does not permit reborrowing.
Are Loan Commitments legally binding?
Yes, once executed, loan commitments are legally binding documents that obligate the lender to provide the specified funds under the agreed terms and conditions.
Related Terms
Locked-In Interest Rate
A pre-agreed interest rate set at the time of the loan commitment, which remains unchanged irrespective of market rate fluctuations. This provides borrowers with predictability in their interest costs.
Construction Loan
A short-term loan used to finance the building of a real estate project. It usually has variable rates and is repaid through conversion to long-term financing or a mortgage once the project is complete.
Takeout Financing
Permanent mortgage financing that replaces interim construction financing. It provides long-term funding post-construction and is typically drawn from a different lender.
Permanent Mortgage
A long-term loan secured by real estate and typically used to replace short-term construction financing or as a standalone financing option for property acquisition.
Online Resources
- Real Estate Glossary by Investopedia: https://www.investopedia.com/real-estate-4427769
- Freddie Mac Learning Center: Understanding Loan Commitments: http://www.freddiemac.com/learn/personal-learning/loan-commitments.html
- U.S. Department of Housing and Urban Development: http://www.hud.gov
References
- “Investing in Real Estate” by David M. Geltner, Norman G. Miller
- “The Real Estate Investment Handbook” by G. Timothy Haight, Daniel D. Singer
- Investopedia: https://www.investopedia.com/terms/l/loan-commitment.asp
Suggested Books for Further Studies
- Real Estate Finance and Investments: Risks and Opportunities by Peter Linneman
- Principles of Real Estate Practice by Stephen Mettling and David Cusic
- Professional Real Estate Development: The ULI Guide to the Business by Richard B. Peiser and David Hamilton
