New Jersey Mortgage Loan Commitment Letter Conditioned on Appraisal

Issue/Inquiry

Can a New Jersey bank condition a mortgage commitment letter on an appraisal that will be obtained at a later date?

Response Summary

New Jersey banking rules stipulate that a commitment is required to be based on an underwriting analysis of an appraisal. Therefore, an appraisal must be obtained before the commitment can be issued.

Response Detail

Generally, a “commitment letter” is a loan document from a financial institution offering to extend credit and describing the conditions of the loan. It is common practice for the parties of a mortgage loan transaction to use a commitment letter to document the agreement before a formal contract is executed. A commitment letter serves several purposes:

• Expresses the approval of the loan under certain conditions
• Provides the details of the transaction
• Handles issues that occur between the approval and the closing
• Parallels the mortgage agreement in reciting some of the provisions that will be found in that agreement

The more complete the commitment letter is in specifying the terms of the loan and the conditions of the approval, the more likely that it will be deemed a formal contract if the transaction fails and one side seeks damages for breach. Mazzagetti, Structuring Mortgage Banking Transactions, 2.03.

The requirements for commitment letters can be affected by the requirements of state law and regulations. For example, the New Jersey Administrative Code defines the term “commitment” as a signed statement that is issued by a lender in which the lender promises to make a loan of specified terms to a specified borrower, and is based on, among other things, a satisfactory underwriting analysis of the appraisal, if an appraisal is required relating to the loan. A “lender” is a state or federally-chartered bank, savings bank, savings and loan association, credit union, or a mortgage lender or correspondent mortgage lender. N.J.A.C. 3:1-16.1.

In this case, since the commitment must reflect an underwriting analysis of an appraisal, the appraisal would need to be made prior to issuing the commitment. As such, the commitment cannot be conditioned upon an appraisal that will be obtained later.

This response is for informational purposes only and is not intended for legal guidance

This entry was posted on Monday, July 27th, 2020 at 6:00 am.