Mortgage Commitment

In the vast majority of closings, the buyers will use a mortgage to purchase the property. The commitment or approval letter is the most important document a borrower receives from the lender prior to closing. It informs the borrower that the loan application has been approved and that the bank has committed itself to lending the requested funds. However, this obligation is often conditioned upon certain requirements that must be met before or at the time of closing. Some of the typical requirements are: (a) an explanation of any unfavorable item in a credit report; (b) verification of the borrower’s employment; (c) provision of a survey; (d) homeowner’s insurance; (e) termite or other inspections; (f) proof of necessary cash funds to close the transaction.

The commitment letter also sets forth the basic terms of the loan (fixed or variable rate, etc.), and the loan associated fees (e.g., points) to be charged by the lender. The lender may require that the borrower sign and return a copy of the commitment or approval letter within a specified period in order for the load commitment to be binding.

Since most purchase contracts are contingent upon the buyers’ obtaining financing by a specific date, it is essential that the attorney is informed as soon as the commitment is received. At that point, the contract becomes unconditional, and all parties and their attorneys can begin the necessary preparations for the closing. Of course, the attorney should be notified immediately if the lenders decline or reject the loan since this can affect the buyers’ liability under the sales contract.