A Consumer's Guide
To Mortgage Lock-Ins
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 upfront 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 page explains what these arrangements mean.
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 could not rely on the terms
quoted to you when shopping for a loan useless a lender is willing to
offer 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 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 1 percent of the loan amount.) Depending upon the lender,
you may be able to lock in the interest rate and n umber 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 your mortgage 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 lender's conditions for making the loan such as receipt of a satisfactory
title insurance policy protecting the lender.
Some lenders have
preprinted forms that set out the exact terms of the lock-in agreement.
Others may only make an oral lock-in 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 lender's 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.
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 upfront, 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.
Lenders may offer
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 10.5 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 2.5. With your lender's agreement,
you could then lock in the lower 2.5 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 has 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.
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 30-60 days are common. But some
lenders may offer a lock-in for only a short period of time (for example,
seven 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 lock-in expires. Before deciding on the
length of the lock-in to ask for, you should find out the average time
for processing loan s 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.
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.
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 two to three 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 canceled 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 request 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.
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 shopping 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.
- How long will
the lock-in last (30, 60, 90, 120 or more days)?
- 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?
Knowing what to look
for puts you in a better position to decide whether, when, and how long
to lock-in mortgage terms and, 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 you 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.
State consumer protection
officers, banking authorities, and offices of the attorney general can
be contacted regarding complaints against many lenders doing business
in the state. (Some states have enacted legislation to specifically address
complaints about mortgage lock-ins.)
In addition, some
lenders are directly supervised by federal regulatory agencies, as shown
in the list that follows:
Mortgage Companies
- Division of Credit
Practices
Bureau of Consumer Protection
Federal Trade Commission
601 Pennsylvania Avenue, NW
Washington, DC 20580
(202) 326-3224
Federally Insured
Savings and Loan Institutions an Federally Chartered Savings Banks
- Office of Community
Investment
Federal Home Loan Bank Board
1700 G Street, NW
Washington, DC 20552
(202) 377-6000
State Member Banks
of the Federal Reserve System
- Division of Consumer
and Community Affairs
Board of Governors of the Federal Reserve System
20th and Constitution Avenue, NW
Washington, DC 20551
(202) 452-3946
National Banks
- Consumer Activities
Division
Office of the Comptroller of the Currency
490 L'Enfant Plaza, SW
Washington, DC 20219
(202) 447-1600
Federally Insured
Nonmember State-Chartered Banks and Savings Banks
- Office of Consumer
Programs
Federal Deposit Insurance Corporation
550 Seventeenth Street, NW
Washington, DC 20429
(800) 424-5488
(202) 898-3536
Federal Credit
Unions
- National Credit
Union Administration
1776 G Street, NW
Washington, DC 20456
(202) 357-1065
The Federal Reserve
Board and the Federal Home Loan Bank Board have prepared this information
on mortgage lock-ins in response to a request from the House Committee
on Banking, Finance and Urban Affairs and in consultation with many other
agencies and trade and consumer groups. It is designed to help consumers
understand an important aspect of home financing.
We believe a fully
informed consumer is in the best position to make a sound financial choice.
This page will provide useful basic information about obtaining the terms
of credit you really want. It cannot provide all the answers you will
need, but we believe it is a good starting point.
The information presented
on this page was prepared in consultation with the following organizations:
- American Bankers
Association
- American Institute
of Real Estate Appraisers
- Comptroller of
the Currency
- Consumer Federation
of America
- Credit Union National
Association, Inc.
- Federal Deposit
Insurance Corporation
- Federal Home Loan
Mortgage Corporation
- Federal National
Mortgage Corporation
- Federal National
Mortgage Association
- Federal Reserve
Board's Consumer Advisory Council
- Federal Trade
Commission
- Independent Bankers
Association of America
- Mortgage Bankers
Association of America
- Mortgage Insurance
Companies of America
- National Association
of Federal Credit Unions
- National Association
of Home Builders
- National Association
of Realtors
- National Council
of Savings Institutions
- National Credit
Union Administration
- Office of Special
Adviser to the President for Consumer Affairs
- Society of Real
Estate Appraisers
- The Consumer Bankers
Association
- US Department
of Housing and Urban Development
- US League of Savings
Institutions
- Veterans Administration
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