Rate Lock: Get It In Writing

What documents should you sign to execute a mortgage rate lock? Always get a rate lock agreement from your broker or banker at the time of lock. Of course, like anything in the real estate or mortgage world, if it’s not in writing it doesn’t exist.

With that in mind, realize that even most rate lock agreements are full of caveats allowing the provider to wiggle out of the rate lock almost at will. Just like the Good Faith Estimate (GFE) is not a “guarantee”, neither is the mortgage rate lock agreement.

But as a consumer, I would rather have the rate lock in writing than not have it.

This is where your mortgage company selection process pays huge dividends. An honest, professional broker will not have all the legalese and escape clauses in their lock agreement. They do what we do which is simply provide a lender lock confirmation of the terms the moment the loan is locked.

I think a retail rate lock versus a lender rate lock confirmation can give a false sense of security and I’ve seen brokers wrap themselves in lock agreements as if that alone proved their integrity. It’s more important to know the rate lock is confirmed with the wholesale lender than worry about rate lock with the broker since most aren’t enforceable anyway.

What document should you ask for after locking?

Now we are talking real proof…the rate lock confirmation. This is a faxed, emailed, or an online document your broker gets from the wholesale lender once your rate lock is confirmed. It outlines the terms of the rate lock…things like type of loan, rate, rebate points, discount points, expiration date of the lock, etc.

Coming directly from the wholesale lender is the key. As we discussed earlier, brokers can’t lock rates directly. They request the rate lock from a wholesale lender, so it’s imperative to see the lender’s confirmation.

Crooked brokers will try to deceive borrowers by doctoring up some kind of “in-house” lock confirmation. Well, that’s not a lender confirmation. It doesn’t prove you’re locked. They typically don’t want you to see what wholesale lender was used to lock your loan for fear you’ll circumvent them and go directly to that lender.

This fear is enormously unfounded so we must ask ourselves is that the real reason brokers don’t want to show you the lender confirmation?

Could it be the lender paid income from upping your rate (YSP or Rebate) is clearly marked on the lender rate lock?

Sure it is.

Brokers give a lot of BS reasons for why they do or don’t do things. Always question when you hear a “reason” for something and it rings false! Of course, you must be trained to understand BS when you hear it. Which is why Terri and I wrote The Mortgage Advantage…read more here…learn to distinguish fact from fiction.

What does it mean to have a mortgage rate lock expire?

An expired lock happens when you didn’t close the loan before the lock period ended. Once it expires the wholesale lender doesn’t have to honor the mortgage rate anymore.

But that’s not the whole story…

The wholesale lender still expects the loan…you locked it on a 30 day…you promised it in 30 days, so let’s have it, right?

The problem is the wholesale lender actually reserved your loan funds and paid money called hedge money to make sure they could give you that rate over that 30 day time frame. Regardless of what the mortgage rate market did inside that duration, you were guaranteed your locked rate. If you didn’t close in time, the hedge is gone. The lender is out the money they paid for the hedge and you are forced to take the original rate or the rate after expiration, whichever is worse.

Ouch!

For example, you lock on a 30 day time period at 6%. You can’t close on time and rates, while you were locked, jumped to 6.5%. The worst case rule means you’re stuck with 6.5% since that’s the worse rate. If rates dropped to 5.5%, you keep 6%. You get the market rate or your locked rate…whichever is worse.

The moral of the story…don’t let rate locks expire…lock with more than enough time to close.

What is “floating” a mortgage rate?

Floating a rate is the opposite of locking a rate. Neither you nor the wholesale lender is obligated to a rate when you float. You are at interest rate risk when floating. You have no protection. If rates are dropping you don’t need protection but that is pretty risky. As I mentioned earlier, the rate increases happen very fast. You could be floating and forget to check on the market one afternoon and BAM!…you just lost a great rate. Floating your mortgage rate is like gambling. You may win but if you lose you usually end up losing big. It is not worth the risk in my opinion.

When can you rate lock?

On a refinance, you can lock at will. On an existing home purchase, you can lock when you get a signed, accepted, seller agreement….not before. The contract terms have a closing date so your mortgage broker knows the duration of lock to execute.

On builder homes that may not be ready for months so don’t consider locking until your new home is at the sheet rock stage. My experience is…you can’t trust a builder foreman telling you they’ll be ready to close in 45 days if they haven’t sheet rocked the home yet. There is nothing worse than believing a deadline, locking on it, and watching the builder shrug their shoulders after their estimate busted the lock. I tell my clients to tell me when the sheet rock is up and get a closing in writing from the builder. With that I suggest at least a 15 day lock buffer past that date. This process has never created a broken lock.

What are your responsibilities after you rate lock?

You have the responsibility to respond in a timely manner to all loan document requests and not be the reason for a delay. All inspections and repairs must be completed quickly so as not to break the lock.

You also have the responsibility to act with honor and not lock simultaneously with 2 different company’s creating a jump lock scenario where you jump from one lender to the other depending on what rates do after you’ve lock with one and floated with the other.

What happens if you cancel your loan after locking?

You can cancel as I said at anytime with a legitimate reason (jumping to another lender with a lower rate is NOT one of them) but there may be some money spent needlessly…appraisals, inspections, etc. As far as locking ramifications go, there are little…unless you fell for one of those 2 point up front extended locks (Ha!)

However, don’t think you can lock, cancel, and lock again on the same property. That’s a no-no. You can lock and cancel on one house. Find another house, lock, and close without issue. Remember though your lock is tied to the property so you are back in the market with the second house.

If rates went up in the interim, well, that’s the breaks.

Good Luck!

Author: Rob K. Blake
Published December 2, 2007