In real estate finance, a standby commitment is an agreement by a lender to provide a loan for a specified period, typically one to five years, if a permanent loan cannot be obtained after construction is completed. It serves as a backup source of financing to ensure that the project can be carried forward.
Standby loans are usually offered at a higher interest rate than permanent financing, reflecting the increased risk to the lender. A standby fee is commonly charged for making the commitment available, even if the loan is never ultimately funded.
