What Is a Back-to-Back Commitment?

A back-to-back commitment is a commitment to make a second take-out loanꦦ that piggybacks another loan. With a back-to-back commitment, once the terms of the first loan are satisfied, they will be rolled into the second loan.

Understanding a Back-to-Back Commitment

The best example of a back-to-back commitment is when a bank makes a construction loan to build a house. Once the house is built and a certificate of occupancy is issued, the bank will make a new loan, probably a first mortgage loan, to take out the construction loan. The bank's commitment will specify the conditions that must be met in order for the commitment to fund the second loan to be valid🐠. The♛ term "back-to-back commitment" may also be used to describe an agreement to purchase a construction loan at a later date.

Benefits of a Back-to-Back Commitment

Back-to-back commitments help lenders to limit their risk. For example, if a bank issues a loan with the agreement that a second bank will buy it out at a later date, the originating bank mitigates risk by only being liable for a short period of the life of the ౠloan. Liability passes 🏅to the bank buying out the loan after a predetermined period.

When a back-to-back commitment is used to roll a construction loan into a 澳洲幸运5开奖号码历史查询:mortgage loan, the lender mitigates risk by gaining acces✱s to collateral to further secure the loan should the borrower default. A construction loan doesn't give the lender access to much collateral. However, if the loan is rolled iꦫnto a mortgage loan once construction has been completed, the lender can use the new structure as collateral.

Example of a Back-to-Back Commitment

A borrower obtains a construction loan from Bank A to build a new restaurant. Bank A agrees to the loan on the condition that a back-to-back commitment is made with Bank B, with Bank B agreeing to buy out the construction loan in a year's time.