What you should know about

LOAN COMMITMENT

What is “loan commitment”?

  Loan commitment is an agreement, frequently in writing, between a lender and a borrower to loan money, at a future date, subject to certain conditions.

 With that said, the State of Wisconsin WB-11 Offer to Purchase provides for a contractual agreement, between the buyer and seller, for this loan commitment to be accepted or rejected by the buyer and delivered to the seller, in writing, within a specified period of time.

  What happens when the accepted Loan Commitment is delivered?  Simply put, the buyer removes the financing contingency and turns the offer into a cash transaction.

The Wisconsin Realtors Association states in their article “Explanation of the State of Wisconsin WB-11 Residential Offer to Purchase”  this:

   “CAUTION:  Delivery of the buyer’s loan commitment to the seller satisfies the financing contingency.  This means that the buyer will become legally bound to close, unless there are other contingencies in the offer that have not been satisfied.  Therefore, a loan commitment should not be delivered to the seller if it has terms and conditions less favorable than those stated in the financing contingency and are not acceptable to the buyer, or if it has conditions the buyer cannot meet.”

Delivering a Loan Commitment that is conditioned upon an appraisal and final investor underwriting could cause you, as a buyer, a real problem.  Why?  Because you have now removed your financing contingency and can be forced to purchase the property regardless of your ability to obtain a loan.

Lenders that issue a Loan Commitment prior to having the loan approved with their bank or investor are doing you a disservice.    Here are the reasons:

1.    You have the impression your loan is approved and ready to close.  It is not.

2.    The appraisal may come in for less than the agreed upon price.  You may then be forced to pay the difference in cash. In addition, your loan amount will be based on the actual appraised value.

3.    The lender, often times, does not have the file ready to close because they are still attempting to get the file through underwriting.

4.    Your loan proceeds may not arrive in time because the lender has not gotten final investor approval or permission for funding.  This will delay or prevent your closing.

5.    If the loan you applied for is not approved, you could find yourself at the mercy of the lender and forced to close another type of loan.  You have lost your ability to withdraw from the contract due to unacceptable loan terms.

6.    You have just provided the seller with a cash offer while you are without financing and most likely without sufficient cash to close as agreed.

Although it may appear impressive to deliver a Loan Commitment letter quickly, you may find it difficult to close when the time comes.

It is always better, for you, to be sure the appraisal has been received and the loan has been underwritten before delivering the Loan Commitment letter to your realtor or the seller.

If you, as a buyer, have been pre-approved properly, have made application within the 10 days stated in the Addendum A and have provided confirmation of this application there is no reason to rush delivery of an unacceptable Loan Commitment.