LET’S TALK REAL LIFE STUFF AGAIN TODAY. Last week we signed a commitment letter for a commercial loan that will cover the acquisition of three properties. Now, this is MY first commercial loan, actually honestly really any loan, I have ever applied for. So, after we signed the commitment letter I really had no idea what to expect. Let me tell you what I learned…
So, as we do, let’s talk Real Estate, let’s talk “I SIGNED A FUNDING COMMITMENT LETTER-NOW WHAT?!…
SO, as I mentioned, last week we signed a commitment letter for a commercial loan that will encompass three different properties and will sit under an LLC of ours. I will tell you more about the specific loan once it funds, but for now I want to talk to you about what happens AFTER all parties sign the commitment letter.
FIRST OFF, WHAT IS A COMMITMENT LETTER?
A commitment letter is a formal document you will receive from your lender AFTER your loan has been approved by the bank. You can expect to receive this letter 20-45 days post application and final documentation submission. We received our commitment letter 37 days (27 business days) post application submission so that falls right in the bucket! Let me know if any of you reading this have had similiar experiences with this time frame!
WHAT IS IN A COMMITMENT LETTER?
The commitment letter will typically lay out everything you need to know about the loan; i.e. type of loan, purpose of loan, amount of loan, terms of loan, collateral attached to loan, conditions of loan, etc.
WAIT, HOW IS THAT DIFFERENT FROM A PRE-APPROVAL OR PRE-QUALICATION?
Pre-qualification : A very high level “Yes / No we can fund your loan” based off a quick, initial conversation between the lender and borrower.
Pre-approval : A pre-approval is a set amount the bank believes they can lend you based on a more detailed look at your financial situation. More often than not, a pre-approval of some sort is required when submitting an offer on a property.
Commitment letter : Your commitment letter is what you receive from the bank after you have passed all of their underwriting guidelines. In order to get approved for a loan, and receive a commitment letter, you will have to provide extensive documentation on your credit and financial history. This letter states that the lender agrees to make the loan as long as the borrower meets certain conditions before closing.
WHAT TYPES OF CONDITIONS ARE TYPICALLY ATTACHED TO A COMMERCIAL LOAN LIKE THIS?
In our case it was personal guarantees, annual submission of personal and business financial statements going forward, homeowners insurance, environmental tests, and giving the bank the 1st lien on all three of the properties and the respective rental payments. We also had to open a checking account with the bank from which they can withdraw the monthly principal and interest payments.
SO WHAT DOES HAPPEN AFTER YOU SIGN THE COMMITMENT LETTER?
After you receive the commitment letter, you can read over the terms and sign if you are content (in our case we wanted to change a few things – we were UNSUCCESSFUL – will touch on that once the deal funds). So, we signed the letter and returned it to the bank, and now we await appraisals. Our particular loan is a blanket loan encompassing three different properties, so this process MAY take a bit longer, and will definitely be more expensive. WE ARE SITTING IN THIS APPRAISAL LIMBO PHASE NOW.
WHAT DO I NEED TO DO WHILE WE AWAIT THE APPRAISALS?
Look into homeowner’s insurance, title insurance (the lawyers handle this part), start budgeting the funds for the closing costs (WHICH CAN BE A LOT OF $$$), and just checking in with all parties to make sure everyone has everything they need!
DOES A COMMITMENT LETTER MEAN YOU ARE CLEARED TO CLOSE?
No! This was news to me! A commitment letter simply states that the lender has agreed to loan the money to the borrower AS LONG AS certain conditions are met! That means we are NOT in the clear just yet! Will let you know what happens next week…
What has YOUR experience been with commitment letters? Are WE missing something here?!
Feel free to comment on the blog post HERE and let us know what YOU think!
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