| Detail | Explanation |
|---|---|
| Issued after | Underwriting and credit committee approval |
| Typical contents | Approved terms, conditions precedent, fees, expiration date |
| Still conditional on | Appraisal, title, environmental, documents, and no material adverse change |
| Followed by | Loan documents and closing |
What is in a commercial loan commitment letter?
A commitment letter usually tracks the term sheet but reflects what credit committee actually approved. Where the committee tightened anything, the letter shows it. Compare the 2 documents line by line before signing.
- Final loan amount and any holdback or earnout
- Rate, index, spread, floor, and when the rate is set
- Term, extensions, amortization, and prepayment terms
- Recourse, carve-out guarantees, and financial covenants for guarantors
- Required reserves and cash management
- Conditions precedent to closing and to each funding
- Commitment fee, expense obligations, and the expiration date
Is a commitment letter binding on the lender?
A signed commitment letter is generally treated as a contract, though its enforceability depends on its wording and the governing law. In practice the lender's obligation is conditional. If an appraisal comes in low, title shows a problem, an environmental report finds a recognized concern, or the property or sponsor suffers a material adverse change, the lender can often reduce the loan or decline to close.
Borrowers take on obligations too. The letter often makes the commitment fee earned on signing and requires payment of the lender's legal and third-party costs whether or not the loan closes. Because the stakes are higher than at the term sheet stage, many borrowers ask counsel to read the letter before signing it. Documents differ by lender and loan.
What conditions can still stop a loan from closing?
Conditions precedent are the list of items the lender must receive or confirm before funding. The common ones are an appraisal that supports the approved value, clean title and survey, a satisfactory Phase I environmental report, property condition findings, insurance, entity documents, estoppels and SNDAs from major tenants, and confirmation that nothing material has changed.
For a construction loan, the list also covers the budget, the general contractor agreement, permits, and often a completion guarantee. Sponsors can shorten the path by ordering long-lead items early and flagging known issues before the letter is issued. Checking value and coverage in the loan sizing calculator before the appraisal arrives helps spot a proceeds cut early.
What happens when a commitment letter expires?
Most commitment letters give the borrower a fixed period to sign and a later date by which the loan must close. If closing slips past that date, the lender may extend, reprice, or withdraw. Build a realistic closing timeline before signing, especially on acquisitions with a hard purchase contract date. If a rate lock is tied to the commitment, a missed deadline can also trigger breakage. Capital Partners manages lender conditions through closing on construction loans and permanent debt, and you can submit a deal to start.
Common questions
Can a lender back out after issuing a commitment letter?
A lender can usually decline to close if a stated condition is not met or a material adverse change occurs. Outside those conditions, backing out is less common and may expose the lender to a claim, depending on the letter and applicable law.
Is the commitment fee refundable?
Often it is not. Many letters state that the fee is earned when the borrower signs. Some lenders credit it against the origination fee at closing or refund it if the lender fails to close.
Does a commitment letter lock my interest rate?
Not always. Some letters fix the spread and leave the index to be set at closing, and others require a separate rate lock agreement. Read the rate section to see what is fixed today.
How long is a commitment letter good for?
The letter sets its own deadline, which varies by lender and loan type. Construction and agency loans often need longer windows than a bridge loan on a stabilized property.
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