If you are funding a loan, then you need to be aware that, when providing a commitment letter to the borrower, how it needs to be formatted and what commitment you are liable for.
The first question that anyone who is either taking a loan or giving asks is: what is a mortgage commitment letter? Well, the answer is not that complicated. It is the information that confirms the willingness of the lender to lend finances to the borrower named in it. In fact, it also states the time period in which the amount needs to be repaid and the rate of interest at which the borrower would be taking the funds. Most of these letters are one of two kinds, the first one being firm commitment that has specific terms under which the borrower takes the finances. In such a case, if you do not fund the loan within a specific period, then the lender can charge you for the cancellation of the mortgage offer. The second type states that there are only certain conditions for the loan to be given to the borrower. As the borrower fulfills certain conditions, the loans are progressively processed. When you are buying a house, home sellers prefer selling it to a borrower who has a firm letter from the lender as compared to the conditional commitment. This is because, with the former, there is a certain sense of surety.
While studying this letter, it is important that you confirm whether yours comes under the firm or conditional category. In the case of the latter, do ask for a list of the conditions, as you may need to disclose the same to the home seller. In some cases, there may be a condition, wherein during the underwriting process, the lender can change the appraised value of the property. In such a scenario, it is important that you discuss this with your lender. So, how long will you have to wait to get a commitment letter? Well, this depends on how long the lender takes to review your financial status. The entire process of submitting the application, the underwriting, and finally receiving the letter may take anywhere between six to eight weeks. While it is possible to look up for its samples online, these are best drafted by authorized personnel.
Writing letters that have legal ramifications can be quite a challenging task. In most cases, these need to be drafted by a legal counsel or a notary and signed by the people concerned. Following is a template for the same; most of these letters are in the form of templates, and the organization in question uses them, changing the details as required.
The first paragraph will congratulate the addressee on their loan being approved. Mention how this approval is subject to the terms and conditions as mentioned in the letter. Also, mention that the addressee will have to include documentation for final approval and that it may be subject to changes, depending on change in the addressee’s financial condition or the property being purchased.
In the next paragraph, you will mention the type of loan that the addressee has applied for, the amount of loan, the time period for which it is being taken, and the interest rate at which it is being purchased. Next, the letter will mention whether the interest rate on the loan is going to be locked in, or it is going to be floating. It will also state the monthly payments that the addressee is liable for and break up of the principal and interest amounts. The due date for each monthly installment will also be included, and also the mention of the interest that will be charged in case of late payments.
The last paragraph will mention the date on which the interest rate lock-in expires and the date of expiration of the commitment. Along with this, mention the liability in case the addressee does not meet the time limitations. Also, mention that all the other details are included as documentation with the letter. In some examples, you will find that the additional details are included in itself, while some samples have this as an enclosed document. The additional details that will be enclosed include information on interest rate adjustment, FHA/VA, Escrow, Assumability, insurance, etc. In the end, mention that the lender has the right to either withdraw the agreement or change the terms of the same.
Congratulate the addressee once again and provide them with your contact details.
Thus, after understanding how such a letter is drafted, you should have no trouble understanding one. Like most other forms of business writing, you need to be extremely careful while drafting one or before signing it as you can be held liable in a court of law if it is produced.