A commitment letter is a beacon of hope rewarding borrowers who qualify for a loan. After going through the approval process, the lender sends a commitment letter indicating that you're approved for your mortgage. While it's often exciting, especially if you're buying a house for the first time, commitment letters come with caveats. That’s not to say you should quell your enthusiasm. You just need to understand what you’re reading.
While the lender commits to give you a loan, it also sets the particulars. The commitment letter clearly indicates the amount, rate and term of your loan. Before issuing the commitment, the lender carefully analyzes your ability to repay the loan. This is based on the loan amount, rate and term, or length, of the loan. The lender also evaluates your collateral to ensure that it's protected in the event that you don’t repay. All this is designed to give you a loan that fits your needs -- and provide a certain level of comfort to the lender.
While terms are important to the loan, you don’t simply sign a few documents and get a check. You also must meet a number of conditions to finalize the deal. These can range from simple, such as providing a copy of your driver’s license, to more complex items such as securing homeowner’s insurance to match the amount of the loan. Ultimately, every transaction is different, so the conditions will vary by borrower and by loan. Whatever conditions exist, the lender will clearly spell them out in the commitment letter.
You would be pretty taken aback if you showed up at closing and were told for the first time that you have to write a check. For this reason, the commitment letter will outline the fees associated with your loan. Like closing conditions, the amount and type of fees vary by loan. Potential fees include commitment, documentation and search fees, title insurance, appraisal review and tax tracking. Be sure to read the fine print as well. Lenders will cover themselves if previously unforeseen costs come into play. Look for something along the lines of “May be subject to additional fees to be assessed at, or prior to, closing.” Stay in contact with your lender throughout the process to stay informed about the costs.
The commitment letter is the lender’s promise to give you a loan. However, you still must endure the closing process. To close the loan and get your money, you need to contact the bank. The commitment letter will give you the name and contact information of the person or department that will coordinate your closing. It will also note how long you have to accept the commitment -- and how long after acceptance you must close. For example, you may have 10 days to sign and return the commitment indicating your acceptance -- and 60 days after that to schedule your closing. If you let that timeframe expire, the bank is not under any obligation to move forward with the loan.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.