By definition, a letter of commitment is a binding formal agreement between a lender and a borrower.
When a borrower enters into a legally enforceable agreement with a lender to get an amount of money as a loan, the requirement of the letter of commitment happens. Letter of commitment is done by the lender. It serves as a document that lists all the details of the loan. The letter constitutes consent on the part of the parties that they have come to an agreement. The document culminates in the borrowing of a loan. The document is comprehensive and details everything with respect to cost thanks to due diligence and diverse other processes.
What does a letter of commitment comprise?
The letter mentions the fee to be paid to the attorney, quantity of the loan to be disbursed, the interest rate, terms and period of repayment.
Why is it required?
The letter aims to tell the borrower about the process of getting the loan that the customer applied for. As a result of the completion of the process, the borrower can avail the cash.
For this all, the borrower must meet to a specific set of terms and conditions to be signed by the borrower implying that the borrower favors the terms and conditionals of the loan.
Further, the borrower has to sign with the lender to the effect that if they don’t meet the terms and conditions no loan is admissible for such a situation. If the borrower fails to sign the document the approved loan is cancelled. By this, all the procedures done uptil now stand annulled.
The letter of the commitment mentioned the amount of the loan to be disbursed on the borrower by the loaning bank. This has dully approved b the company.
Bank Commitment Letter Example
Here are one loan commitment letter example below in pdf :
loan commitment letter example in pdf
What does the letter of commitment mention?
Along with other things, the document mentions the amount of loan the bank is ready to give the borrower. This amount may vary: higher than the application amount or maybe below the application amount.
Note that the commitment letter is an official record for the loan that the borrower requests. Once the borrower agrees to accept the terms and conditions, the lender and the borrower sign the real loan agreement to get the fund disbursal.
Uses of the letter of commitment
The document is a useful document for the borrower. They may use it as proof to show others that they possess a specific amount of credit in hand to get an asset.
The document helps the burrower win the confidence of the parties that are interested in the business of the borrower has the capacity to honor the word and buy assets prior tot he expiry of the period.
To simplify it, let’s suppose that an individual applies to a bank for mortgage finance. The individual has to submit a commitment letter to the owner as proof that they have enough funds to strike the purchase deal. This helps the owner of the property to judge the ability of the borrower to accomplish the deal within the time period agreed.
Thus, the letter could act as a document of a surety so a deal can be funded to a specified limit as the bank involved in the deal decides.
It’s important to note that when a person applied for a loan and gets a letter of commitment, it does not mean any pressure or force on the applicant to accept it.
As an applicant, a person can approach as many banks as they want to approach.
How to obtain it
If you’re planning to borrow an amount of money from a bank or any such entity, you have to goa long the rules of the process. Consider your sources of income, assets, past credit history and make sure you do the homework yourself. This helps you determine if you’re strong enough to pay back the borrowed money.
It’d also help you explore other considerations like bringing down the amount of money you wish to loan.
Once you’re sure you are strong enough to pay back the amount, you approach a bank.
Having made multiple rounds of discussions with you, the bank finally agrees to give you a loan. Now it’s time you start the process.
You need to these:
1) The application process
The borrower has to honor the standard application procedure as per the rules of the bank. The borrower will have to provide their personal details like current loans, income, social security number, location address and the amount of loan you’re planning to borrow.
2) Credit history
The borrower will have to enable the lender to assess the credit history. With this, the lender will assess the credit history.
3) Submission of documents
This is a more important process in checking the suitability of the loan applicant. The borrower has to submit proof of their financial ability to repay the loan.
Thus, they will have to submit things like tax returns, pay stubs, and asset ownership proof.
According to the quantum of loan, the bank may think to check the financial reports and tax submissions for a definite period. This will help them assess the applicant with more relevant proofs.
If the borrower plans to use the loan amount to finance a mortgage for a home, the lending entity provides a letter before they give the form of the document.
The documentary proofs that the borrower needs to submit to the lender documents including property appraisal (property to be bought) the sales contract to which all the parties are a signatory. As the letter of commitment is sent to the borrower, it states the amount of loan approved, the terms and conditions the borrower has to fulfill before they sign the final document.
How long does a letter of commitment last?
The letter is meant for a specific period. The date of the expiry of the agreement is mentioned in the document. By this, if they are unable to finance before the date of expiry, the lender will not be under the obligation to lend money as per the terms of the loan.
The letter of commitment is an important document for borrowers. It will help them get clarity on the date, duration and the way the loan is to be repaid. Preserve the document carefully until you repay the money completely. Research well before you apply.