Legal Definitions - commitment letter

A commitment letter is a formal, written document from a lender that outlines the specific terms and conditions under which they agree to provide financing. It serves as a preliminary agreement, indicating the lender's intent to fund a loan, provided the borrower meets all stated requirements. This letter is not the final loan agreement itself, but rather a crucial step that details the proposed loan amount, interest rate, repayment schedule, fees, and any other conditions that must be satisfied before the loan is finalized.

• Example 1 (Residential Mortgage): Sarah and Tom are buying their first home. After applying for a mortgage, their bank sends them a commitment letter. This letter specifies the exact amount the bank is willing to lend them, the fixed interest rate for the next 30 years, the estimated monthly payment, and conditions like needing a satisfactory home appraisal and proof of homeowners insurance before the loan can close.

  Explanation: This illustrates a commitment letter as a lender's formal offer for a mortgage, detailing the key financial terms and conditions necessary for the loan to proceed.

• Example 2 (Business Expansion Loan): A small manufacturing company, "InnovateTech," seeks funding to purchase new machinery and expand its production line. After reviewing their business plan and financials, a commercial bank issues InnovateTech a commitment letter. This document outlines a $500,000 term loan, an adjustable interest rate tied to the prime rate, a 7-year repayment period, and conditions such as requiring a lien on the new equipment and a personal guarantee from the company's owner.

  Explanation: Here, the commitment letter serves as the bank's written promise to provide business financing, clearly stating the loan's structure, cost, and the obligations InnovateTech must fulfill to secure the funds.

• Example 3 (Construction Loan): A real estate developer, "Urban Renewal Inc.," is planning to build a new apartment complex. They secure a commitment letter from a construction lender. This letter details a multi-million dollar loan facility, specifying that funds will be disbursed in stages as construction milestones are met, outlines the interest rate (often variable), the duration of the construction phase, and critical conditions such as obtaining all necessary building permits and providing regular progress reports and inspections.

  Explanation: This example demonstrates a commitment letter in a complex financing scenario, where the lender commits to providing funds for a large-scale project, with specific terms for disbursement and ongoing conditions tied to the project's progress.