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 brochure 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
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.
