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Loan Commitment

DEFINITION

An agreement statement by a lender regarding the terms of the loan.

EXPLANATION

A loan commitment is a preliminary promise by a lender to offer financing to a prospective borrower who applied for a loan. A loan commitment is more commonly referred to as a commitment letter because it is a letter of intent from the lender to commit to financing. A letter of intent states the terms and provisions of the lenders offer for financing including the rate, terms, and fees.

A loan commitment is provided by lenders to consumers after the lender has initially reviewed the borrower’s financials. It is not a final approval, rather it is meant to state that the loan will be granted after the lender has the chance to fully review the borrower’s application. After a loan commitment letter has been given to a prospective borrower, the lender will finalize their decision based on the final information submitted to the lender. This will likely include a review of paystubs, other forms of income, and review of previous debt.

Types of Loan Commitments

There are various types of loan commitments and some may be subject to change depending on the specific financials of the borrower. A lender for example may state that a borrower can qualify for a 10-year loan, however after further review alter the terms of the approval and qualify the borrower only for a 30-year fixed. The rate stated on the loan commitment may also be subject to changes depending on the risk of approving the borrower for that program.

Oftentimes lenders provide open-ended loan commitments that are subject to changes. An open-ended commitment refers to anything that is subject to change and approvals that apply to transactions that are not for a one-time use such as a lump sum program or a continuous until the loan is paid back. A loan commitment is either unsecured or secured. A secured loan is a loan whereby qualification is based on collateral such as the value of a property and an unsecured loan refers to a loan that requires no collateral. Secured loans typically refer to mortgages that use property and unsecured loans oftentimes refer to personal loans.

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