What Is a Mortgage Commitment Fee?

Mortgage companies lend money to credit-worthy borrowers to purchase homes. In addition to the interest charged on the loan amount, the lender charges certain fees up front when the loan originates. The mortgage commitment fee is one such type of fee. Mortgage lenders typically charge it in exchange for a commitment to advance unused credit to the borrower in the future.

These fees are generally lumped together in “closing costs” paid by borrowers on the date the loan closes. The mortgage commitment fee is generally a closing cost, but may not always be a necessary expense, depending on the loan agreement.

However, it helps to factor it in during any real estate acquisition. Then you can do some financial planning to accommodate the extra costs that may be separate from the mortgage loan payments.

Mortgage lending companies define the mortgage commitment fee differently compared to any other type of loan. So, before deciding on your lender, review a complete explanation of their specific terms concerning the loan agreement.

Generally, you can pay this fee in return for the credit facility making a written promise to fund the loan. Some lenders may consider the commitment money as a more general fee for processing the loan and paying for the underwriting process. Other lenders accept this fee on the condition to keep a line of credit open for future use for a specified period of time.

In addition, be sure to obtain the mortgage commitment letters as a guarantee that you will get the pre-approved mortgage loan later, especially if your state laws dictate you must have one. For example, in the state of Vermont, every credit facility must issue a commitment letter with every residential mortgage loan, and each can be signed electronically.

Typically, mortgage commitment fees tend to be charged in the form of percentages relative to the undisbursed loan amount. The Corporate Finance Institute says they usually range from ‌0.25 percent to 1 percent‌. However, you may also be able to negotiate a flat fee amount, especially if you intend to get a one-time loan in the future.

The terms of your loan agreement will determine whether the mortgage commitment fee is refundable. In some circumstances, the lender may refund you the fee after you complete the loan balance repayment according to the agreed-upon terms. But you are unlikely to get the money back if you breach the contract.

You can amortize a commitment fee over the life of the loan according to the number of days set. The IRS may consider it the cost of acquiring a loan and, thus, tax-deductible as a business expense in the taxable year during which you incurred them. But if you don’t utilize the commitment fee, you could claim a loss deduction when the specified period of time expires.

Mortgage points are another type of fee paid by the borrower to lock in a lower interest rate. Depending on how a specific lender handles points, the commitment fee may serve as points paid.

In this situation, the commitment lies in the terms of the interest rate on the loan. Generally, this can take place when the commitment fee charged equals a percentage of the loan amount rather than a flat rate.

In addition to mortgage commitment fees, mortgage companies can apply various other closing costs. The most common are loan origination charges, underwriting fees, document preparation costs and appraisal fees.

Additionally, lenders generally require borrowers to pay application fees and a fee to run their credit reports. These fees pay for the expenses of the application processing and final determination of loan approval.

Many functions take place behind the scenes from the time of a loan application until the credit facility funds the loan.

It may be possible to negotiate closing costs with a lender. However, each situation is unique and lenders do not all operate the same way. It is important for borrowers to consider how the upfront charges will offset later costs.

For example, paying a commitment fee in the form of points to lower the interest rate may be a wise choice if the borrower intends to remain in the home for an extended period.