What is a Letter of Commitment?

by Investing School on January 12, 2011

A letter of commitment is a formal, legal document sent to a loan applicant from a lender that outlines the offer of a loan to the applicant. The letter of commitment covers the precise terms and conditions for the proposed loan.

The letter of commitment essentially serves to inform the applicant that his or her loan has been approved within the completion of specific conditions. The letter also serves as the cover letter to the official loan contract, which is signed by both lender and borrower.

Any loan applicant should review the letter of commitment very carefully, because the details are spelled out therein. For example, the amount of the loan and the interest rate are found in the letter, as well as details about the payment installments, in some cases. Other related details like pre-payment penalties or other subjects may also be covered.

It is important to recognize that the receipt of a letter of commitment is not binding for the loan applicant. In fact, an applicant may receive a number of different commitment letters from various lenders, offering a variety of loan commitments. However, in this case, the borrower can choose the best letter of commitment for his or her situation. Applicants can then simply inform the other potential lenders that he or she has accepted the loan offer from a different lender, ideally through a formal reply letter, including the letter of commitment and other included paperwork with their response.

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