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The commitment or approval letter is the most important
document a borrower receives from the lender prior to closing.
It informs the borrower that the loan application has been
approved and that the bank or mortgage company has committed
itself to lending the requested funds. However, this obligation
is often conditioned upon certain requirements that must
be met before or at the time of closing. Some of the typical
requirements are:
- Explanation of any unfavorable item in a credit report
- Verification of the borrower's employment
- Homeowners insurance
- Inspections of the property
- Appraisal
- Proof of necessary cash funds to close the transaction
The
commitment also sets forth the basic terms of the loan
and the associated loan fees to be charged by the lender.
The lender may require that the borrower sign and return
a copy of the commitment or approval letter within a
specified period in order for the loan commitment to
be binding.
Since most purchase contracts are contingent upon the buyers'
obtaining financing by a specific date, it is essential that
the attorney be informed as soon as the commitment is received.
At that point, the contract becomes unconditional, and all
parties and their attorneys can begin the necessary preparations
for the closing. Of course, the attorney should be notified
immediately if the lender declines or rejects the loan, since
this can affect the buyers' liability under the purchase
and sale contract.
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