Commitment Letter
A commitment letter is a formal document from a lender stating their intention to provide a mortgage loan to a borrower under specified terms and conditions. It outlines the loan amount, interest rate, loan term, and any conditions that must be met before closing, serving as a more definitive approval than a pre-approval letter.
Example
“After reviewing all the financial documents, the bank issued a commitment letter stating they would provide a $400,000 mortgage loan at 6.5% interest rate.”
Memory Tip
Think of a commitment letter as a 'financial engagement ring' - the lender is promising to marry your loan application (but they can still back out before the wedding).
Why It Matters
A commitment letter gives buyers confidence to move forward with a purchase and provides sellers with assurance that financing is likely to be secured. It helps prevent deals from falling through due to financing issues and strengthens a buyer's negotiating position.
Common Misconception
Some people think a commitment letter guarantees the loan will close, but it's still conditional and can be withdrawn if circumstances change or conditions aren't met.
In Practice
After a buyer's loan application is fully underwritten, their lender issues a commitment letter for a $400,000 mortgage at 6.5% interest, conditional on a satisfactory appraisal and final verification of employment. The buyer can now confidently proceed to closing knowing their financing is secured.
Etymology
The term 'commitment letter' comes from the Latin 'committere' meaning 'to pledge or entrust,' describing a formal document where a lender pledges to provide financing under specified conditions.
Common Misspellings
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