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When you're looking for a mortgage, you're likely to shop among
lenders for the most favorable interest rate, and the lowest points and
other up-front charges. When you find the most favorable terms and the
lender that you want, you'll apply to that lender. But when you get to
settlement, will you actually receive the terms you applied or bargained
for? Or will you find that the rate has changed-and that your costs have
gone up?
Lock-ins on rates and points might offer you a way to ensure that
what you shop for is what you get. This article explains what these
arrangements mean.
All About Lock-Ins
In most cases, the terms you are quoted when you shop among lenders
only represent the terms available to borrowers settling their loan
agreement at the time of the quote. The quoted terms may not be the
terms available to you at settlement weeks or even months later.
Therefore, you should not rely on the terms quoted to you when shopping
for a loan unless a lender is willing to offer a lock-in.
What Is a Lock-In? A lock-in, also called a rate-lock or rate
commitment, is a lender's promise to hold a certain interest rate and a
certain number of points for you, usually for a specified period of
time, while your loan application is processed. (Points are additional
charges imposed by the lender that are usually prepaid by the consumer
at settlement but can sometimes be financed by adding them to the
mortgage amount. One point equals one percent of the loan amount.)
Depending upon the lender, you may be able to lock in the interest rate
and number of points that you will be charged when you file your
application, during processing of the loan, when the loan is approved,
or later.
A lock-in that is given when you apply for a loan may be useful
because it's likely to take your lender several weeks or longer to
prepare, document, and evaluate your loan application. During that time,
the cost of mortgages may change. But if your interest rate and points
are locked in, you should be protected against increases while your
application is processed. This protection could affect whether you can
afford the mortgage. However, a locked-in rate could also prevent you
from taking advantage of price decreases, unless your lender is willing
to lock in a lower rate that becomes available during this period.
It is important to recognize that a lock-in is not the same as a
loan commitment, although some loan commitments may contain a lock-in. A
loan commitment is the lender's promise to make you a loan in a specific
amount at some future time. Generally, you will receive the lender's
commitment only after your loan application has been approved. This
commitment usually will state the loan terms that have been approved
(including loan amount), how long the commitment is valid, and the
lenders conditions for making the loan such as receipt of a satisfactory
title insurance policy protecting the lender.
Will Your Lock-In Be in Writing? Some lenders have preprinted
forms that set out the exact terms of the lock-in agreement. Others may
only make an oral lock-in promise on the telephone or at the time of
application. Oral agreements can be very difficult to prove in the event
of a dispute.
Some lenders' lock-in forms may contain crucial information that is
difficult to understand or that is in fine print. For example, some
lock-in agreements may become void through some unrelated action such as
a change in the maximum rate for Veterans Administration guaranteed
loans. Thus, it is wise to obtain a blank copy of a lenders lock-in form
to read carefully before you apply for a loan. If possible, show the
lock-in form to a lawyer or real estate professional. It is wise to
obtain written, rather than verbal, lock-in agreements to make sure that
you fully understand how your lender's lock-ins and loan commitments
work and to have a tangible record of your arrangements with the lender
This record may be useful in the event of a dispute.
Will You Be Charged for a Lock-In? Lenders may charge you a fee
for locking in the rate of interest and number of points for your
mortgage. Some lenders may charge you a fee up-front, and may not refund
it if you withdraw your application, if your credit is denied, or if you
do not close the loan. Others might charge the fee at settlement. The
fee might be a flat fee, a percentage of the mortgage amount, or a
fraction of a percentage point added to the rate you lock in. The amount
of the fee and how it is charged will vary among lenders and may depend
on the length of the lock-in period.
What Options Are Available for Setting the Mortgage Terms? Lenders
may offer different options in establishing the interest rate and points
that you will be charged, such as:
Locked-In Interest Rate-Locked-In Points. Under this option, the
lender lets you lock in both the interest rate and points quoted to
you. This option may be considered to be a true lock-in because
your mortgage terms should not increase above the interest rate and
points that you've agreed upon even if market conditions change.
Locked-In Interest Rate-Floating Points. Under this option, the
lender lets you lock in the interest rate, while permitting or
requiring the points to rise and fall (float) with changes in
market conditions. If market interest rates drop during the lock-in
period, the points may also fall. If they rise, the points may
increase. Even if you float your points, your lender may allow you
to lock-in the points at some time before settlement at whatever
level is then current. (For instance, say you've locked in a 10 1/2
percent interest rate, but not the 3 points that went with that
rate. A month later, the market interest rate remains the same, but
the points the lender charges for that rate have dropped to 2 1/2.
With your lender's agreement, you could then lock in the lower 2
1/2 points.) If you float your points and market interest rates
increase by the time of settlement, the lender may charge a greater
number of points for a loan at the rate you've locked in. In this
case, the benefit you might have had by locking in your rate may be
lost because you'll have to pay more in upfront costs.
Floating Interest Rate-Floating Points. Under this option, the
lender lets you lock in the interest rate and the points at some
time after application but before settlement. If you think that
rates will remain level or even go down, you may want to wait on
locking in a particular rate and points. If rates go up, you should
expect to be charged the higher rate.
Because practices vary, you may want to ask your lender whether
there are other options available to you.
How Long Are Lock-Ins Valid? Usually the lender will promise to
hold a certain interest rate and number of points for a given number of
days, and to get these terms you must settle on the loan within that
time period. Lock-ins of 30 to 60 days are common. But some lenders may
offer a lock-in for only a short period of time (for example, 7 days
after your loan is approved) while some others might offer longer
lock-ins (up to 120 days). Lenders that charge a lock-in fee may charge
a higher fee for the longer lock-in period. Usually, the longer the
period, the greater the fee.
The lock-in period should be long enough to allow for settlement,
and any other contingencies imposed by the lender, before the lock-in
expires. Before deciding on the length of the lock-in to ask for, you
should find out the average time for processing loans in your area and
ask your lender to estimate (in writing, if possible) the time needed to
process your loan. You'll also want to take into account any factors
that might delay your settlement. These may include delays that you can
anticipate in providing materials about your financial condition and, in
case you are purchasing a new house, unanticipated construction delays.
Finally, ask for a lock-in with as few contingencies as possible.
What Happens if the Lock-In Period Expires? If you don't settle
within the lock-in period, you might lose the interest rate and the
number of points you had locked in. This could happen if there are
delays in processing whether they are caused by you, others involved in
the settlement process, or the lender. For example, your loan approval
could be delayed if the lender has to wait for any documents from you or
from others such as employers, appraisers, termite inspectors, builders,
and individuals selling the home. On occasion, lenders are themselves
the cause of processing delays, particularly when loan demand is heavy.
This sometimes happens when interest rates fall suddenly.
If your lock-in expires, most lenders will offer the loan based on
the prevailing interest rate and points. If market conditions have
caused interest rates to rise, most lenders will charge you more for
your loan. One reason why some lenders may be unable to offer the
lock-in rate after the period expires is that they can no longer sell
the loan to investors at the lock-in rate. (When lenders lock in loan
terms for borrowers, they often have an agreement with investors to buy
these loans based on the lock-in terms. That agreement may expire around
the same time that the lock-in expires and the lender may be unable to
afford to offer the same terms if market rates have increased.) Lenders
who intend to keep the loans they make may have more flexibility in
those cases where settlement is not reached before the lock-in expires.
How Can You Speed Up the Approval of the Loan? While the lender
has the greatest role in how fast your loan application is processed,
there are certain things you can do to speed up its approval. Try to
find out what documentation the lender will require from you.
Much of the information required by your lender can be brought with
you when you apply for a loan. This may help to get your application
moving more quickly through the process. When you first meet with your
lender, be sure to bring the following documents:
The purchase contract for the house (if you don't have the
contract, check with your real estate agent or the seller).
Your bank account numbers, the address of your bank branch and your
latest bank statement, plus pay stubs, W-2 forms, or other proof of
employment and salary, to help the lender check your finances.
If you are self-employed, balance sheets, tax returns for 2-3
previous years, and other information about your business.
Information about debts, including loan and credit card account
numbers and the names and addresses of your creditors.
Evidence of your mortgage or rental payments, such as cancelled
checks.
Certificate of Eligibility from the Veterans Administration if you
want a VA-guaranteed loan. Your lender may be able to help you
obtain this.
Be sure to respond promptly to your lender's requests for
information while your loan is being processed. It is also a good idea
to call the lender and real estate agent from time to time. By calling
occasionally, you can check on the status of your application, and offer
to help contact others such as employers who may need to provide
documents and other information for your loan. It is also helpful to
keep notes on your contacts with the lender so that you will have a
record of your conversations.
Ask About Lock-Ins
When you're ready to settle on your loan, you'll want to get the
loan terms that you've locked in. To increase that likelihood, it is
important to learn as much as you can about what the lender is promising
you before you apply for a loan. Ask for the following information when
you shop for a loan:
Lock-Ins and Fees
Does the lender offer a lock-in of the interest rate and points?
When will the lender let you lock in the interest rate and points?
When you apply? When the loan is approved?
Will the lock-in be in writing? If the lock-in is not in writing,
you will have no record of the lender's agreement with you in case
of a dispute.
Does the lender charge a fee to lock in your interest rate? Does
the fee increase for longer lock-in periods? If so, how much?
If you have locked in a rate, and the lender's rate drops, can you
lock in at the lower rate? Does the lender charge you an additional
fee to lock in the lower rate?
Can you float your interest rate and points for now, and lock them
in later?
Loan Processing Time
How long does the lender expect to take to process your loan?
What has been the lender's average time for processing loans
recently?
Has the lender's loan volume increased? Heavy volume might increase
the lender's average processing time.
Expiration of Lock-Ins
What rate will be charged if the lock-in expires before
settlement-the rate in effect when the lock-in expires?
If you don't settle within the lock-in period, will the lender
refund some or all of your application or lock-in fees if you
decide to cancel the loan application?
If your lock-in expires and you want to get another lock-in at the
rate in effect at the time of the expiration, will the lender
charge an additional fee for the second lock-in?
Complaints About Lock-Ins
Knowing what to look for puts you in a better position to decide
whether, when, and how long to lock in mortgage terms. Also, by helping
to keep the loan process moving, you can lessen the chance that your
lock-in will run out before settlement.
But what if your lock-in does lapse? If you believe that the lapse
was due to delays caused by the lender or someone else involved in the
loan process, you should try first to reach a mutually satisfactory
agreement with the lender. If that effort fails, consider writing to the
appropriate state or federal regulatory agency.
Some lender actions, such as offering lock-in terms which are
impossible to fulfill, failing to process your loan diligently, or
causing your lock-in to expire are improper--and may even be illegal. In
addition, because you may have contractual rights under your lock-in or
loan commitment, you may want to consult with an attorney. Be aware,
though, that complaints may not be resolved as quickly as may be
necessary for a home purchase.
Depending upon their authority under applicable state or federal
law, regulatory agencies may either attempt to help you resolve your
complaint directly or record your complaint and recommend other action.
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