Back-to-Back Commitment
What Is a Back-to-Back Commitment?
A back-to-back commitment is a commitment to make a subsequent take-out loan that piggybacks another loan. With a back-to-back commitment, when the terms of the principal loan are fulfilled, they will be rolled into the subsequent loan.
Figuring out a Back-to-Back Commitment
The best illustration of a back-to-back commitment is the point at which a bank makes a construction loan to build a house. When the house is fabricated and a certificate of occupancy is issued, the bank will make another loan, most likely a first mortgage loan, to take out the construction loan. The bank's commitment will determine the conditions that must be met for the commitment to fund the second loan to be legitimate. The term "back-to-back commitment" may likewise be utilized to portray an agreement to purchase a construction loan sometime in the not too distant future.
Benefits of a Back-to-Back Commitment
Back-to-back commitments assist lenders with limiting their risk. For instance, assuming that a bank issues a loan with the agreement that a subsequent bank will buy it out sometime in the future, the starting bank mitigates risk by just being obligated for a short period of the life of the loan. Liability passes to the bank buying out the loan after a predetermined period.
At the point when a back-to-back commitment is utilized to roll a construction loan into a mortgage loan, the lender mitigates risk by accessing collateral to additional secure the loan should the borrower default. A construction loan doesn't give the lender access to much collateral. Be that as it may, assuming that the loan is rolled into a mortgage loan whenever construction has been completed, the lender can involve the new structure as collateral.
Illustration of a Back-to-Back Commitment
A borrower gets a construction loan from Bank A to build another restaurant. Bank A consents to the loan depending on the prerequisite that a back-to-back commitment is made with Bank B, with Bank B consenting to buy out the construction loan in a year's time.
Features
- A back-to-back loan mitigates risk for the lender by involving terms of the principal loan as collateral for the subsequent one.
- A back-to-back commitment is a commitment to make a subsequent take-out loan on top of a first loan.
- Back-to-back commitment loans are common in the construction industry.
