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A Consumer's Guide To Mortgage Lock-Ins
|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.
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 unless 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 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 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 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:
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 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.
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.
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
Expiration of 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 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:
The information contained in this brochure is intended to help you ask the right questions when shopping for a loan. It is not a replacement for professional advice. Talk with mortgage lenders, real estate agents, attorneys, and other advisors, about lending practices, mortgage instruments, and your own interests before you commit to any specific loan.
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