When is a loan commitment binding

The answer is both yes and no and depends a lot on how the letter is written. It is recommended that if this is a question of concern that you consult with your attorney for legal advice. Lenders often include conditions that would allow them to step away from the loan, but simultaneously obligate the borrower to move forward with the loan as long as all the terms listed in the letter are met. This means that while the lender can still back out, some letters prevent borrowers from declining the loan.

Why would a borrower want to decline a loan? A borrower may have found a loan with a different lender with more favorable terms. An interest rate that is even a quarter of a percentage lower can result in thousands of dollars in savings over the life of a loan.

However, if the borrower has already signed a commitment letter, they may be obligated to stick with the loan with the higher rate. Borrowers that are still shopping for the best loan should not rush to sign a commitment letter that carries an obligation clause or hefty fees for cancelling the loan process. Ideally, borrowers and lenders are on the same page when they execute a mortgage loan commitment letter.

The buyer borrower is committed to the loan and will follow all qualification guidelines while the lender will have fully completed due diligence and is ready to fund the loan for closing. The content and format of a Term Sheet vary by lender, but they generally contain the following information:. From a timing standpoint, a term sheet is issued early in the life of the loan transaction and it is used by the borrower to show sellers and investors that they are working with a lender for financing.

It is a legally binding agreement for the issuance of a term loan or credit facility. Often, the final loan terms are close or identical to those described in the Term Sheet.

The Commitment Letter is signed by both the lender and the borrower, which typically indicates legal enforceability should any legal challenges arise. The commitment letter is also provided by the borrower to investors and sellers as proof of funding to give these parties confidence that they can close. Bottom line: the key difference between a Term Sheet and a Commitment Letter is that a Term Sheet is provided near the beginning of the transaction and is not a legally binding commitment to lend; it is subject to terms and conditions.

A Term Sheet is a legally binding commitment to lend, and both parties must follow through or they may face legal consequences.

Again, sellers do not want to take their house off the market unless they are fairly certain the transaction will be completed. To satisfy the condition relating to the property, the property must appraise for the purchase price or greater and may need to pass a physical inspection. Unfortunately, buyers often underestimate the seriousness of this warning. They see loan commitment as a green light to move on with their lives and go out and make purchases to prepare for that new life.

This can leave them with a bunch of new stuff and no place to keep it. The loan commitment is not some legally binding guarantee of a mortgage. This is a reassurance to the seller who has taken their home off the market and off the radar of other potential buyers in anticipation of closing this sale. Please note this approval is subject to the following conditions:. I am looking forward to working with you towards the successful close of this transaction.

You can trust that my team will keep you informed every step of the way. If you have any questions or need additional information, please feel free to contact me. To clarify how the pre-qualification, pre-approval, and loan commitment all fit into the big picture, here is a look at the steps in the buying process leading up to the loan commitment:. From this point, the chosen loan officer can provide the Loan Commitment Letter and move the transaction into the final stage of the financing process, and finish processing the loan documents.

To reiterate, the loan commitment is conditional, so the loan commitment letter does not constitute official approval of the loan. Official approval can only be granted after the two conditions are met. Buyers will need to provide complete documentation to confirm that they are financially stable and likely able to accept this new debt in addition to their existing debt payments and other living expenses.

Buyers will need to provide their most recent financial documents to show that their financial position has not changed since their pre-approval. It is possible for the buyer to fail to meet the condition of the loan commitment, thereby losing their loan commitment and even their pre-approval.

Lenders are looking for financially stable borrowers. Examples of behavior that could result in a revocation of the loan commitment and pre-approval include:. As a general rule, buyers should avoid doing anything that might change their financial position from the time pre-approval is granted until the close of escrow.

During the due diligence phase of the transaction, a more detailed evaluation of the property takes place. This should include an appraisal and often includes an inspection of the physical condition of the property.