Learn how to write a loan commitment letter by following these mission-critical steps, including outlining the loan type and loan amount.
Writing a detailed and legally binding loan commitment letter requires close attention to detail. Some credit unions use saved templates to streamline the process. Credit union board leaders must know the elements of a commitment letter to ensure their credit union provides the best loan experience to its members. Read on to learn how to write a loan commitment letter and why it matters.
What Is a Loan Commitment Letter?
A loan commitment letter is a formal agreement between a credit union and a borrower that outlines the loan’s terms and conditions. The loan commitment letter kickstarts the loan borrowing process.
Typically used for mortgage loans, the approval letter informs the borrower that the credit union has processed the loan application and the money is available to the applicant. Financial institutions use loan commitment letters to inform borrowers they must meet particular terms and conditions to access the loan.
Loan commitment letters are either secured or unsecured, the former of which requires collateral to back up the loan.
A loan commitment letter includes:
- Loan amount
- Loan type
- Repayment terms and period
- Interest rate + date of lock expiration
- Attorney fees or any other fees incurred during loan document preparation
- Terms and conditions
- Cancellation policy
- Closing conditions
A credit committee within a credit union board of directors is responsible for reviewing and approving loans. While a loan commitment letter is a formal record of loan processing, it’s not the actual loan contract. Once the borrower signs the agreement letter, the lender and borrower sign the loan contract.
What Is the Difference Between Pre-Qualification vs. Loan Commitment?
Pre-qualification and loan commitment are different stages in the loan generation process. Pre-qualification comes first, and can be completed online in minutes. The purpose is to tell the buyers how much they can afford to spend based on financial details they submit. It doesn’t involve credit report analysis, although pre-approval (for an approval letter) does.
On the other hand, a loan commitment confirms the lender’s intent to provide a certain amount of funding for the purchase. In order to receive a loan commitment, the borrower’s finances must meet underwriting process guidelines from the lender.
How to Write a Loan Commitment Letter
This section walks you through the 4 essential steps of writing a loan commitment letter.
1. Document Loan Recipient and Lender
An excellent loan commitment letter must include all crucial details about the lender and borrower. This information makes the agreement legally binding after signing off.
When writing a loan commitment letter, include lender information like:
- Lender’s name — the business name of your credit union
- Address to lender’s physical location
The loan recipient information includes:
- The borrower’s official name
- The recipient’s address
Depending on the type of loan, you can include the borrower’s guarantor’s name and address, too. If it fits your financial institution, the loan commitment agreement can include the lender’s information at the top left and the recipient’s name in the salutation section.
2. Outline Loan Type and Amount
Including the loan type and amount in your loan commitment letter clarifies details for the lender and borrower. Specify the exact amount your institution is lending and the loan type — personal loan, mortgage loan, etc. The loan type specifies how the borrower wishes to use the money, which is essential in case of disputes during repayment.
3. Outline Repayment Agreement
A repayment agreement is a legally binding section in your loan commitment letter. It shows the amount a borrower owes a lender. The agreement should specify the total interest (in cash and percentage) based on the lender’s terms and conditions during the application process. In addition, the repayment agreement must state the full payment amount and when the payments start and end.
4. Document Loan Expiration
The loan expiration dates show the period in which the lender’s funds are available for the borrower, after which the loan closes. The loan expiration determines when the commitment letter expires.
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Writing a loan commitment letter is easy if you follow the simple steps above. The must-have details in your loan commitment letter are the lender’s and borrower’s information, loan type and amount, repayment agreement, and loan expiration.
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