What Happens After a Loan Commitment Letter?
Move from loan commitment to funding with clear guidance on the crucial steps to finalize your financing.
Receiving a loan commitment letter marks a significant milestone in the borrowing process. This formal document outlines the terms and conditions under which a lender will provide financing. It signifies that your loan application has undergone initial review and the lender intends to fund the loan, provided certain prerequisites are met. While this letter is a positive step, it is not the final approval. The journey from commitment to loan closing involves several important stages requiring careful attention and timely action.
Understanding Your Commitment Letter
Carefully reviewing your loan commitment letter is paramount. This document serves as a blueprint for your loan, detailing the agreed-upon financial terms and requirements for loan disbursement. Key components typically include the loan amount, the interest rate (whether fixed or adjustable), the loan term, and the repayment schedule.
The letter will also itemize various fees associated with the loan, such as origination fees, appraisal fees, and title insurance costs. It will outline any specific conditions that must be satisfied for the loan to proceed. These conditions might range from providing updated financial statements to securing particular types of insurance. Financial covenants, if applicable, may also be present, especially for business loans, dictating certain financial ratios or reporting requirements.
An expiration date will be clearly stated, indicating the timeframe within which all conditions must be met and the loan closed. This deadline necessitates prompt action. Should any term or condition appear unclear, promptly seeking clarification from your lender is advisable before moving forward.
Satisfying Loan Conditions
The next phase involves actively fulfilling the stated conditions. This often requires the borrower to gather and submit various documents to the lender. Common requests include updated financial statements, recent tax returns, bank statements to verify assets, and, for business entities, relevant licenses or legal formation documents.
Beyond general financial documentation, certain loans, particularly those involving real estate, may have specific stipulations. For instance, you might need to secure property insurance, such as homeowner’s insurance or flood insurance if the property is in a designated flood zone, with coverage effective from the closing date. The lender may also require specific inspections, such as a property condition assessment or environmental reports, to ensure the asset meets their standards. Proactive communication with your lender is important for submitting documents and providing updates.
The lender also undertakes actions, often with your cooperation, to complete due diligence. For real estate loans, an appraisal will be ordered to determine the property’s market value. A title search is conducted to verify ownership and identify any existing liens or encumbrances on the property, followed by title insurance to protect both you and the lender. Depending on the property, a survey may be needed to confirm boundary lines. The lender will also verify information provided in your application, such as employment history, income, and asset holdings, to ensure accuracy.
Final Review and Closing Preparation
Once the borrower has submitted all required documentation and the lender has completed verifications, the process moves into the final review stage. The lender’s underwriting department conducts a comprehensive review of all collected information, including financial documents, appraisal reports, and title searches. This examination ensures that all conditions stipulated in the commitment letter have been met and that no new issues have arisen.
Successful completion of this review leads to the “clear to close” status, which signifies the loan has received final internal approval and is ready for closing. This triggers coordination of the closing date and time. All parties involved, including the borrower, lender, title company or closing attorney, and potentially real estate agents, work together to schedule this event.
For residential loans, the lender is required to provide a Closing Disclosure (CD) at least three business days before the scheduled closing. This document provides a final, itemized list of all loan terms, fees, and closing costs. Borrowers should carefully compare the Closing Disclosure with the initial Loan Estimate to identify any discrepancies. For commercial loans, a similar final loan summary will be provided for review.
The Loan Closing
Loan closing represents the official culmination of the borrowing process, where legal documents are signed and funds are disbursed. Typically, the borrower, a representative from the lender, and a title agent or closing attorney are present. For real estate transactions, real estate agents may also attend.
During the closing, the borrower will sign numerous documents. These include the promissory note, which is the borrower’s promise to repay the loan and outlines the specific terms of repayment. For real estate loans, a mortgage or deed of trust is also signed, pledging the property as collateral for the loan. Other documents may include truth-in-lending disclosures, various affidavits confirming the accuracy of information, and an updated loan application.
Closing costs and fees, as detailed in the Closing Disclosure, are typically paid at this time. These costs may include title insurance premiums, attorney fees, recording fees, and prepaid interest. Funds are then disbursed by the lender to the appropriate parties, such as the seller, existing lienholders, or service providers involved in the transaction. Finally, relevant documents, such as the mortgage or deed of trust, are recorded with the local government authority to establish the lender’s lien on the property.