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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 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 page explains what these arrangements
mean.
All
About Rate 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 could not rely on the terms quoted to
you when shopping for a loan useless a lender is willing to
offer a lock-in.
What
Is A Rate 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 pre-paid 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.
Will
Your Lock-In Be In Writing?
Some lenders have pre-printed
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.
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 Term?
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 up-front
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 30-60 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.
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 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.
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 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?
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 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
Agencies
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.)
Federal
Agencies
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, N.W.
Washington, D.C. 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, N.W.
Washington, D.C. 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, N.W.
Washington, D.C. 20551
(202) 452-3946
National Banks
- Consumer Activities Division
Office of the Comptroller of the Currency
490 L'Enfant Plaza, S.W.
Washington, D.C. 20219
(202) 447-1600
Federally Insured Non-Member
State-Chartered Banks and Savings Banks
- Office of Consumer Programs
Federal Deposit Insurance Corporation
550 Seventeenth Street, N.W.
Washington, D.C. 20429
(800) 424-5488
(202) 898-3536
Federal Credit Unions
- National Credit Union Administration
1776 G Street, N.W.
Washington, D.C. 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
- U.S. Department of Housing
and Urban Development
- U.S. League of Savings Institutions
- Veterans Administration
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