Commitment Fee
Definition and meaning of Commitment Fee in real estate.
A commitment fee is a charge paid by a borrower to a lender to secure a guaranteed loan amount and specific terms for a future period.
In more detail
This fee compensates the lender for locking in the interest rate and setting aside funds that cannot be lent to other borrowers. In residential lending, it is often charged during new home construction or when a buyer requires a long rate-lock period (the timeframe during which a lender guarantees a specific interest rate).
The fee is typically calculated as a percentage of the total loan amount or as a flat charge, and it may be non-refundable if the borrower decides not to close the loan. Borrowers should clarify whether the commitment fee will be credited toward their closing costs when the mortgage is finalized.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Cost Structure | Typically a flat fee or a small percentage of the total loan amount |
| Primary Purpose | Secures a guaranteed interest rate and loan funds for a set period |
| Refundability | Usually non-refundable if the borrower fails to close the loan |
To lock in their mortgage interest rate during the six months it took to build their house, the buyers paid the lender a commitment fee at application.
Frequently asked questions
Is a commitment fee the same as an origination fee?
No, a commitment fee secures the rate and funds before closing, while an origination fee covers the administrative costs of processing and creating the loan.
When is a commitment fee typically paid?
It is usually paid upfront when the lender issues the commitment letter or when the borrower requests a long-term rate lock.