What Is a Bank Confirmation Letter?
Also known as a bank letter of confirmation, a bank confirmation letter is a document that confirms that a loan or a line of credit has been established with a specific financial institution. The main purpose of the letter is usually to verify with a third party that a customer of the institution has access to the resources required to successfully execute a given business deal. It is not unusual for the text of the letter to specifically address the deal in question, including the specific amount of financial support the bank has extended to its customer.
In some situations, this confirmation letter is also referred to as a comfort letter. This is in reference to the degree of relief or comfort that the recipient of the document obtains from the knowledge that a buyer does have sufficient resources to engage in a given business deal. In some countries, governmental regulations require that the bank reveal if the line of credit or loan is limited in scope; that is, whether or not the bank’s customer is free to use those resources for any purpose other than the one identified in the confirmation letter.
The actual text of a bank confirmation letter will vary, depending on the nature of the business transaction under consideration. For example, if the letter is intended to confirm that the bank customer has sufficient financing to purchase a home, the text may confirm to a realtor or a seller that the bank has approved a mortgage for all or a portion of the purchase price. Typically, the letter does not confirm that the customer has definitely decided to buy the real estate in question, only that he or she has the resources to go through with the purchase if the customer decides to do so.
A bank confirmation letter may also be prepared on behalf of a business client to confirm the existence of a line of credit. This is often helpful in situations where the business has plans of entering into a working relationship with several other businesses to fund a common project. By affirming that the business has the resources on hand to participate in the project, the letter helps to settle any worries that any commitments or covenants made in connection with that project are likely to be fulfilled.
In general, a bank confirmation letter ensures all concerned parties that the financial reserves needed to complete a specific financial transaction are available to the bank customer. A confirmation letter is usually only considered official when signed by bank representatives that are authorized to issue correspondence of this type, and is not transferable to another business or financial opportunity. In the event that the bank customer chooses to not enter into the proposed transaction for any reason but decides to go with a different option, the preparation of another bank confirmation letter is normally required.
@Logicfest -- These things make buyers more comfortable in more areas than real estate. I've known some private car dealers who have loved these things, for example. It is always a great idea to get one of these when the situation calls for it. There's nothing that puts a seller at ease more than letting him or her know that they are negotiating with someone who has the ability to actually make a purchase and finance it.
These types of letters are becoming increasingly important in real estate. Those are often called pre-approval letters (and other such things) in real estate, but it all boils down to the same thing -- can make good on an offer because a bank has agreed to advance a mortgage up to a certain amount.
If you were to visit with a real estate agent about these letters, you would probably be told that getting one is a great idea. Having one of those can really speed up the process of purchasing home and certainly makes sellers more comfortable about negotiating a sale price.
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