Stage 3: Underwriting and Approval
When the lender is satisfied with the results of full underwriting, they issue a commitment letter (some lenders call it an approval letter). This is the first legally binding document in the B&I loan process. This letter represents the lender’s formal conditional approval of the loan, spelling out the agreed-upon terms and the conditions that must be met before the loan can close and fund.
Once both parties sign the commitment letter, they’re bound to the stated terms. But ‘conditional’ is the operative word – the loan isn’t done yet. Closing conditions must be satisfied, third-party reports must come back within acceptable parameters, and the USDA guarantee must be approved before funds can be disbursed.
Contents of the Letter
The commitment letter is the formalization of the loan process up to this point. It typically includes:
• Final Loan Terms
The definitive terms of the loan: loan amount, down payment, interest rate, term length, repayment structure, and any special provisions. These reflect the outcome of the underwriting analysis and the negotiations from pre-qualification, finalized based on what full underwriting confirmed.
• Conditions for Loan Closing
A list of specific items that must be completed or provided before the loan can close. These are the remaining hurdles between approval and funding, and they’re the focus of the closing process that follows.
• Required Deposits
The upfront costs the borrower is responsible for, detailed in Step 10. These typically include the cost of third-party reports like appraisals and environmental assessments.
Common Conditions
The specific conditions vary by deal, but most commitment letters include some version of the following:
• Completed Closing Process
The commitment letter is not the finish line – the full closing process still needs to be completed. This includes providing updated financial documents, required insurance policies, and business licenses, along with satisfying any other items the lender specifies. The lender also handles the USDA guarantee application and coordinates with the Rural Development office during this phase.
• Payment of Required Deposits
The borrower must pay the required deposits outlined in the letter before the loan can proceed. These cover costs that are incurred in advance of loan funding, such as third-party report expenses. The payment of the USDA guarantee fee is also a usual condition, but as it can be so large its amount is typically added to the loan and paid as the loan closes (rather than being paid now).
• Expected Results from Third Party Documents
The loan’s final terms – and in some cases its viability – depend on the results of third-party reports ordered during the closing process. If a property appraisal comes in below the expected value, for example, the loan amount or terms may need to be adjusted. The commitment letter typically states that the loan is contingent on these reports falling within given ranges.
