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.
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 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.
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.
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.
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.
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 higher of the prevailing interest rate and points, or your locked in rate. 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 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 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:
- 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?
- 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.
- 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 i f 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:
- Division
of Credit Practices
Bureau of Consumer Protection
Federal Trade Commission
601 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
(202) 326-3224
- Office
of Community Investment
Federal Home Loan Bank Board
1700 G Street, N.W.
Washington, D.C. 20552
(202) 377-6000
- 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
- Consumer
Activities Division
Office of the Comptroller of the Currency
490 L'Enfant Plaza, S.W.
Washington, D.C. 20219
(202) 447-1600
- Office
of Consumer Programs
Federal Deposit Insurance Corporation
550 Seventeenth Street, N.W.
Washington, D.C. 20429
(800) 424-5488
(202) 898-3536
- 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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