What is a commitment letter?

A commitment letter is a binding contract that details the terms of the loan. It represents a lender's formal offer to provide a mortgage to a borrower under specified conditions. This letter is significant because it not only confirms that the lender has approved the borrower's application based on the information provided but also outlines important aspects of the loan, such as the loan amount, interest rate, repayment terms, and any conditions that need to be met before the mortgage can be finalized.

Understanding this document is crucial for borrowers as it gives them assurance that financing has been secured, provided that they comply with any outlined conditions. This clarity distinctions the commitment letter from other documents that may simply outline requirements or provide suggestions without binding guarantees.