Commitment Letter

How a commitment letter works

A commitment letter is the document that turns a lender's interest into a lender's promise. It arrives after the lender has collected your financials, ordered its reports and taken the loan through credit approval. It states the loan amount, rate, term, fees, collateral, guaranty and covenants the lender has agreed to, and then lists everything that must still be true or delivered before the lender funds. Lenders also call it a loan commitment.

The letter is almost always drafted on the lender's form. You sign it to accept, usually by a stated date, and usually with a fee or deposit. After you sign, the lender's lawyers draft the loan documents and the deal moves toward closing.

It is a conditional promise. The lender is bound to lend on those terms if you satisfy each condition before the letter expires. If a condition fails, the lender's obligation may fall away, and you may still owe fees and expenses. Read the conditions as carefully as the rate.

What a commitment letter usually contains

• Borrower, guarantor and property: the exact legal entities. A mismatch with the purchase contract can cause delay.
• Loan terms: amount (often expressed as the lesser of a dollar figure and a percentage of appraised value or cost), interest rate or index and spread, term, amortization and any interest-only period. See loan term vs. amortization.
• Fees: a commitment fee or deposit, the origination fee, and an estimate of the lender's legal and third-party costs.
• Rate treatment: whether the rate is fixed in the letter, floats until a rate lock, or is set by a formula at closing.
• Prepayment and recourse: the prepayment structure, and who signs the guaranty, including any carve-outs if the loan is non-recourse.
• Reserves and escrows: taxes, insurance and any lender-required reserves. See escrow and impounds.
• Conditions to closing: the list that decides whether the commitment holds. Common items are described below.
• Expiration and acceptance: the date by which you must sign and return it, and the date by which the loan must close.
• Expense and fee obligations: your agreement to reimburse the lender's out-of-pocket costs, and, in some letters, to pay a fee if the loan does not close.

Conditions to closing: where commitments fail

Most of the fine print is here. The conditions are the lender's way of confirming that the property and borrower still match what it approved. Typical ones:

• Satisfactory appraisal. The loan is tied to value. If the appraisal comes in below the price, an LTV-based loan shrinks. See LTV.
• Title and survey. A title policy with exceptions acceptable to the lender, and a survey where required.
• Environmental report. A clean report, or a resolution plan the lender accepts.
• Insurance. Coverage in the amounts and form the lender requires, with the lender named properly.
• Leases, estoppels and financials. Updated rent roll and operating statements, and tenant estoppels when the lender wants them.
• Entity and authority documents, legal opinions, and the signed loan documents themselves.
• No material adverse change. A clause that lets the lender walk away if your finances, the guarantor's or the property's condition deteriorate between commitment and closing. How that phrase is defined varies, and the exact wording matters.
• Accuracy of information. The commitment assumes what you told the lender was true and complete. New facts can change the terms or end it.

Practitioners often note that lenders want room to terminate during due diligence if title, valuation or environmental problems appear, and that a lender with that discretion is still generally expected to act in good faith and in a commercially reasonable way. Ask what standards the lender will apply to each condition before you sign.

Commitment letter vs. term sheet vs. letter of intent

	Term sheet	Commitment letter
Issued	Before full underwriting	After underwriting and credit approval
Lender bound?	Generally no	Generally yes, if conditions are met and the letter has not expired
You bound?	Generally no, except specific clauses	Fees, deposits and expense reimbursement usually apply
Detail	Summary of proposed terms	Detailed terms and a full conditions list
Typical use	Compare lenders, negotiate	Proof of financing for a seller; basis for loan documents

The term sheet is the earlier, non-binding proposal. A letter of intent is usually the buyer's offer to a seller, not a lender document. Because lenders use these names loosely, a document titled “conditional commitment” may be closer to a term sheet, and a document titled “term sheet” may contain binding fee and expense language. Judge each by what it obliges, not by its title. Some banks, especially for smaller loans, skip a separate commitment letter and draft loan documents from the signed term sheet.

Worked example: what a low appraisal and a slipped date can cost

You are buying a $2,000,000 property with a $1,400,000 loan (70% of the price). The commitment letter sizes the loan at the lesser of $1,400,000 and 70% of appraised value, with a 25-year amortization and a 5-year term at 6.75%. Every figure below is an assumption for illustration, and payments come from the site’s commercial mortgage calculator.

Scenario	Loan	Equity you need	Monthly payment
Appraised at $2,000,000, rate 6.75%	$1,400,000	$600,000	$9,673
Appraised at $1,800,000, rate 6.75%	$1,260,000	$740,000	$8,705
Appraised at $2,000,000, rate resets to 7.25%	$1,400,000	$600,000	$10,119

Two things can go wrong with the same signed letter. If the appraisal comes in 10% under the price, the lesser-of formula cuts the loan by $140,000, and you must bring that much more cash to closing or renegotiate the price. The commitment was honored, since the lender is lending 70% of the appraised value, but the deal you planned is not the deal you can close.

The second risk is rate. If your letter does not lock the rate and closing slips past a lock window, a move from 6.75% to 7.25% raises the payment by $446 a month, or $5,359 a year ($121,432 − $116,073). Add a fee. If the letter charges an extension fee of 0.25% of the loan, that is $3,500 on $1,400,000, plus the legal cost of an amendment. These are assumed numbers, not typical ones. Your letter’s numbers are the ones that count.

The lesson is to compare the commitment letter to your timeline and your contract, not just to the term sheet. Check the expiration date against your purchase contract’s closing date, and ask what happens to the loan amount if the appraisal is lower than expected.

Why lenders care

For the lender, the commitment letter is the point at which it tells a borrower and a seller it will lend. That is why the letter has a deadline, a fee and a long conditions list: the fee is typically described as covering the lender’s work and costs, and the conditions protect it from lending against a property or borrower that has changed since approval.

It also matters on your side of the transaction. A seller or a seller’s broker reads a commitment letter as proof that a lender has approved the loan, and a purchase contract may use it to set a financing contingency date. A term sheet carries less weight because the lender has not yet approved the credit. See our term sheet entry for the earlier step.

What to check before you sign

• Acceptance and closing deadlines. Two dates: when you must sign, and when the loan must close. Compare the second to your contract. Standard timing varies by product, and a conventional bank loan can take 30–45 days, while a bridge loan can take 14–30 days, so make sure the letter’s date matches the product.
• Fee and deposit. How much, when it is due, whether any part is credited at closing, and whether it is refundable if the lender withdraws or changes the terms.
• Loan amount formula. A fixed dollar amount, or the lesser of two numbers? What happens if the appraisal or underwritten income is lower?
• Material adverse change. How it is defined, whose finances it covers (yours, the guarantor’s, the property’s), and who decides.
• Rate mechanics. Fixed now, locked at a trigger, or floating. If the letter does not lock the rate, know when and how the lock happens. See rate lock.
• Expense and break-up provisions. What you reimburse if the deal dies, and whether it applies when the lender causes the failure.
• Conditions you cannot control, such as a lender approval of a tenant, a third-party consent or a legal opinion, and how long each takes.
• Extension terms. Whether the lender will extend the closing date, and at what cost.
• Differences from the term sheet. Compare line by line. A commitment letter that changes a term you negotiated is a reason to stop and ask before signing.

How to negotiate it

Your best leverage came earlier, at the term sheet, so the commitment letter should confirm what you negotiated rather than reopen it. Still, several points are worth asking for: a conditions list with dates and responsible parties, a closing date that leaves room for a normal slip, a fee credited against the origination fee at closing, a rate lock or a stated lock date, a cap on the lender’s third-party and legal costs, and a definition of material adverse change that is specific. If you have two lenders, tell each what the other is offering.

Have a real estate attorney read the letter before you sign and before you pay the fee, because the expense, fee and termination clauses carry into the loan documents.

Common mistakes

• Treating it as cash in hand. It is a conditional promise. Do not make irreversible commitments, such as releasing contingencies or ordering non-refundable work, until you know which conditions are still open.
• Missing the acceptance date. Letters often lapse if the signed copy and fee do not reach the lender in time.
• Ignoring the closing deadline. The loan date and the purchase contract date should be set together, with room to spare.
• Changing facts mid-deal. A new lien, a lost tenant, a changed ownership structure or a missed payment on another debt can trigger the adverse-change clause or force re-underwriting.
• Not reading the fee language. Many commercial letters say fees and deposits are non-refundable.
• Waiting to ask for an extension. Ask for a written extension before the date passes. After it lapses, the lender is generally not obliged to renew on the same terms.

What it means for you

A commitment letter is the point where a loan becomes real, and also the point where you owe real money and real obligations. Use it as a checklist: get every condition done early, keep your financials and the property unchanged, and keep the lender informed of anything new. To see how lenders would size and structure your deal before you reach this stage, send us your property and numbers. For how a lender reads your documents, see what lenders look at.

Sources: general commercial lending practice as described in published legal guidance on term sheets and commitment letters (Poyner Spruill, “A Refresher on Term Sheets and Commitment Letters”; FNRP, “What Is the Difference Between a Term Sheet and Commitment Letter?”; “Commercial Real Estate Loan Documentation Best Practices”). Material-adverse-change wording, fee terms and extension practice are general practice and vary by letter. Terms, enforceability and refund rules vary by lender, loan and state. Rates, fees and the comparison above are assumptions for illustration, with payments and balances calculated by the site’s commercial mortgage calculator. This is general information, not legal advice.