Commitment Letter
Definition and meaning of Commitment Letter in real estate.
A commitment letter is a formal document issued by a lender stating their official offer to loan a specific amount of money to a borrower under defined terms.
In more detail
This letter marks the transition from pre-qualification to formal approval, providing proof to sellers that the buyer has secured financing. It details the interest rate, amortization schedule, loan type, and any conditions that must be resolved before closing, such as final employment verification or updated bank statements.
For home buyers, receiving this letter is a critical milestone that allows them to satisfy the financing contingency (a contract clause allowing the buyer to cancel if they cannot get a loan) in their purchase contract. Sellers generally require a copy of this letter before agreeing to move forward with the final steps of the closing process.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Required For | Satisfying the financing contingency in a purchase contract |
| Contents | Loan amount, interest rate, term, and remaining conditions |
| Significance | Serves as the lender's formal promise to fund the loan |
The home buyers forwarded the lender's commitment letter to the seller's agent to satisfy the financing contingency in their contract.
Frequently asked questions
Does a commitment letter guarantee the loan will close?
It is a strong promise, but not a absolute guarantee, as the lender can still cancel if the borrower fails to meet the outstanding conditions or if their financial profile changes.
How long is a commitment letter valid?
Validity periods vary, but they typically expire in 30 to 60 days, requiring the borrower to close the loan within that window.