What Is A Commitment Letter?

The definition of a commitment letter or letter of commitment in real estate is a letter whose purpose is to inform a loan applicant that their application has been processed and their funds are available for withdrawal. The letter also details the terms and conditions which the applicant must agree to in order to withdraw the loan. If the terms and conditions are not agreed to by the applicant, the loan will be denied or revoked. 

The letter of commitment continues by specifying the address of both the applicant and the lender. While a letter of commitment isn’t the same as the loan contract, it does serve to specify all the details of the actual contract, so as to avoid any complications due to either party being uninformed. 

The letter of commitment should also specify the amount requested by the borrower, as well as the amount granted by the lender in the final loan contract. After the terms laid out in the commitment letter have been agreed to, the funds may be accessed by the borrower. 

What is the purpose of a commitment letter?  

A letter of commitment has several purposes, but its primary purpose is to serve as proof of intent for the borrower. With a letter of intent, a home buyer can demonstrate to a seller that they are in fact serious about buying the property, giving the seller peace of mind and security. 

Not only does a commitment letter serve as proof of intent, it also shows that the buyer has a line of credit with which to purchase the property. As a home sale can be a long and drawn out process, the best way to prove a line of credit besides having cash in hand is a letter of commitment.