A loan commitment letter sets out every material term of the financing a lender has approved for you: the loan amount, the interest rate and whether it’s fixed or adjustable, the repayment schedule, the collateral securing the loan, the conditions you have to clear before closing, the rules you must follow for as long as the loan is outstanding, the fees you owe, the date the offer expires, and the events that will put you in default. It is the document that turns a lender’s preliminary willingness into a concrete promise to fund a specific transaction on specific terms.
How It Differs From a Pre-Approval
Pre-approval comes early. It tells sellers you’re financially qualified in general terms, but it doesn’t bind the lender to fund any particular deal. A commitment letter arrives later, after the lender has evaluated both you and the specific property, completed underwriting, and reviewed the appraisal. What remains at that point is usually documentation rather than open credit questions, which is why sellers, title companies, and closing attorneys treat a commitment letter as the real thing.
The Core Financial Terms
The first thing to read is the money. The letter states the exact principal the lender will advance, the interest rate, whether that rate is fixed or adjustable, the loan term, and how you’ll repay. A residential mortgage section reads plainly: a 30-year fixed rate at a stated percentage, with monthly principal and interest.
Commercial loans get more involved. A variable-rate commercial loan will reference a benchmark index, most commonly the Secured Overnight Financing Rate, plus a fixed spread. Products using SOFR typically rely on an average of the rate over a period rather than any single day’s reading.1Federal Reserve Bank of New York. An Updated User’s Guide to SOFR The letter will spell out how the average is calculated and how often the rate resets.
Repayment structure in commercial deals often mismatches the amortization period and the actual loan term. Payments may be calculated as if you had 25 years to repay, but the loan itself matures in 5 or 10, with the remaining balance owed as a balloon. The commitment letter lays this out explicitly, including payment frequency and due dates.
Collateral and Loan-to-Value
The letter identifies the collateral, whether that’s a home, a commercial building, equipment, or financial assets, and states the required loan-to-value ratio. Federal banking regulators set supervisory LTV ceilings that banks cannot exceed: 65% for raw land, 75% for land development, 80% for commercial or multifamily construction, and 85% for improved commercial property.2Office of the Comptroller of the Currency. Comptrollers Handbook – Commercial Real Estate Lending Individual lenders often set stricter limits than the regulatory ceiling, so a 75% cap on a commercial deal is common.
Rate Lock
Residential commitment letters generally include a rate lock that guarantees your interest rate for a set period, commonly 30, 45, or 60 days.3Consumer Financial Protection Bureau. Whats a Lock-In or a Rate Lock If closing slips past that window, an extension can cost between 0.25% and 1% of the loan amount, though some lenders use a flat fee. Check who pays for a delay: most lenders won’t charge you if the holdup was on their side.
Commercial commitments handle rate risk differently. The rate may float until a specified lock date closer to closing, or the spread over SOFR may be locked while the index continues to move. Either way, the mechanics should be unambiguous on the page.
Conditions You Have to Clear Before Closing
Every commitment letter lists conditions you must satisfy before funds are released. These are not suggestions. Miss one, and the lender has no obligation to close.
Appraisal and Property Reports
For any loan secured by real estate, the lender requires a satisfactory appraisal confirming the property’s value supports the loan at the agreed LTV. Under federal rules, lenders must give you free copies of all appraisals and other written valuations developed in connection with your application if the loan is secured by a first lien on a dwelling.4National Credit Union Administration. Equal Credit Opportunity Act Regulation B Commercial transactions often add environmental site assessments, property condition reports, and surveys.
Title and Loan Documents
You’ll need a clean title insurance policy protecting the lender against ownership disputes or liens. The full document set has to be finalized: the promissory note, the mortgage or deed of trust, and any personal or corporate guarantees. If the borrower is an LLC or corporation, the lender will require certified resolutions from the governing body authorizing the debt, and the closing attorney typically has to issue a legal opinion confirming the documents are enforceable.
Financial Verification and Insurance
The lender will confirm your financial situation hasn’t deteriorated since application. A significant job loss, new debt, or business downturn between application and closing can be grounds to withdraw the commitment. That’s the material adverse change provision, and it functions both as something you represent to the lender and as a trigger the lender can pull.
You’ll also need proof of adequate insurance on the collateral, with the lender named as loss payee or mortgagee depending on the asset. That designation gives the lender the right to receive insurance proceeds even if you’ve done something to void the policy, and it requires the insurer to give the lender 30 days’ notice before canceling coverage.
Rules You Have to Follow After Closing
The letter also governs your conduct for as long as the loan is outstanding. These provisions split into affirmative covenants (things you must do) and negative covenants (things you can’t do), with financial covenants layered on for commercial deals.
Affirmative Covenants
Ongoing duties. Common ones include delivering annual financial statements within a set window after your fiscal year ends, maintaining the collateral in good condition, paying property taxes before they go delinquent, and keeping required insurance in force. Commercial reporting requirements can be heavy, sometimes requiring audited statements prepared by independent accountants.
Negative Covenants
Restrictions on what you can do without the lender’s written consent. The most common bar you from taking on additional secured debt, selling or transferring the collateral, and making fundamental changes to your business structure like mergers or ownership transfers. Residential borrowers encounter a version through the due-on-sale clause, which makes the full balance due if you transfer the property without consent.
Financial Covenants
Commercial and corporate loans often impose performance tests you have to keep passing. The most common is a debt service coverage ratio, which measures whether the property or business produces enough income to cover its debt payments with a cushion. A minimum DSCR of 1.25x is standard in commercial real estate, meaning the property must generate $1.25 in net operating income for every $1.00 in debt service. Slipping below that ratio counts as a technical default even if every payment has been on time.
Fees You Owe
The letter itemizes everything you’ll pay beyond interest. Expect some combination of the following:
- A commitment fee, typically calculated as a percentage of the loan amount and charged when you accept the letter. It’s often non-refundable, meaning you lose it if the deal falls through even for reasons outside your control.
- An origination fee for processing and underwriting, commonly 0.5% to 1% of the loan amount.
- Appraisal fees. Commercial real estate appraisals can run $2,000 to $5,000 for smaller properties and over $10,000 for larger facilities. Equipment appraisals range from roughly $500 to $10,000 depending on complexity.
- Legal fees covering the lender’s attorney and any required legal opinions.
- Title insurance and government recording charges, which vary by jurisdiction.
- Environmental and inspection costs, including Phase I environmental assessments and property condition reports on commercial deals.
You generally pay these regardless of whether the loan closes. Read the letter carefully to see what you’re committing to the moment you sign.
Expiration Date
Every commitment letter has a deadline. Residential commitments commonly run about 30 days. Commercial commitments may run longer depending on transaction complexity. If closing doesn’t happen by the expiration date, the commitment terminates on its own. You’d forfeit any non-refundable fees already paid, and if you still wanted the loan you’d have to start over at whatever rates and terms were then available.
What Puts You in Default
Default is defined far more broadly than missing a payment. Typical triggers include:
- Payment default: failing to make a scheduled payment of principal or interest.
- Covenant breach: violating any affirmative, negative, or financial covenant, such as failing to deliver financial statements or letting insurance lapse.
- Material misrepresentation: any significant falsehood in your loan application or closing documents.
- Bankruptcy or insolvency: filing for bankruptcy protection or becoming unable to pay debts as they come due.
- Material adverse change: a significant deterioration in your financial condition or business prospects. This clause gives the lender broad discretion and can be invoked before and after closing.
When default hits, the lender’s most powerful remedy is acceleration: declaring the full outstanding balance immediately due. The lender can also foreclose on pledged collateral and exercise a right of setoff against deposits you hold at the same bank. Most letters give you a cure period for non-monetary defaults, often 10 to 30 days, to fix the problem before acceleration. Payment defaults may carry shorter windows or none at all.
What to Push Back On Before You Sign
A commitment letter is not take-it-or-leave-it, especially for commercial borrowers. Your leverage is highest between receiving the letter and signing it. Once you sign and pay the commitment fee, that leverage drops sharply. Experienced borrowers focus on a handful of provisions:
- Commitment fee timing. Try to delay paying the fee until closing, or negotiate a partial refund if the deal doesn’t close because the lender fails to perform.
- Prepayment flexibility. Seek the right to prepay without penalty. If the lender insists on a lockout or yield maintenance provision, work to shorten the lockout or cap the prepayment cost.
- Financial covenants. Negotiate the specific thresholds, testing periods, and cure rights for any DSCR, net worth, or other financial tests.
- Transfer restrictions. Carve out exceptions for estate planning transfers, moves between existing owners, and transfers to affiliated entities so routine activity doesn’t trigger default.
- Escrow requirements. Try to eliminate escrow deposits for taxes and insurance, or limit them to situations where you’re already in default.
Residential borrowers have less room on individual terms, but you can still compare commitment letters from multiple lenders and push on fees, rate lock duration, and closing cost estimates.
Disclosures That Travel With a Residential Loan
If your loan is a residential mortgage, federal law requires standardized disclosures alongside the commitment process. The lender must deliver a Loan Estimate within three business days of receiving your application, which federal rules define as the point when you’ve provided your name, income, Social Security number, property address, estimated property value, and desired loan amount.5Consumer Financial Protection Bureau. Guide to Loan Estimate and Closing Disclosure Forms The Loan Estimate breaks down your projected interest rate, monthly payment, and closing costs in a format that makes it easier to compare offers.
Before closing, you must receive a Closing Disclosure at least three business days in advance. It shows the final terms and costs, and it should closely mirror what the commitment letter promised. Significant divergence is a signal to raise questions before you sit down at the closing table.5Consumer Financial Protection Bureau. Guide to Loan Estimate and Closing Disclosure Forms These requirements apply to most closed-end consumer mortgages secured by real property, but not to home equity lines of credit or reverse mortgages.