Locking The Rate
All About Locking the Rate
We are in a time where rates are historically low, and very volatile. Everyone wants the lowest rate possible, so the question I am invariably asked is, "When can I lock the rate?" Before I can answer that, you must understand what has happened in the industry, and how the rules have changed.
Briefly, lenders have lost billions, and they are now much more risk averse. That means they are tired of losing money - and no longer tolerate someone locking the rate and then not having the loan close.
You need to realize that locking a rate means that the lender is making a financial commitment in the marketplace.
If the lender does not deliver that loan as agreed, then the lender must pay a penalty. Lenders used to absorb this, but those days are over. Lenders now pass that loss on to the mortgage company. If that happens too much, the lender TERMINATES the relationship with the mortgage company. That's the absolute worst thing that can happen to a mortgage company, so guess what? They will not let that happen.
So, what does the mortgage company do? If a loan is not delivered because the borrower decided to go somewhere else, then the mortgage company will pass that cost on to the mortgage broker. If that happens too much, the mortgage company TERMINATES the mortgage broker.
Yes, that is right. Everyone is getting pretty serious these days - but that's the nature of the beast.
So, what do we learn from this? First, we make sure we have a solid deal BEFORE we lock the rate.
That means we get the appraisal done first. That means the complete loan file is submitted to the lender. That means we make sure the loan can fund BEFORE we lock.
It's the right thing to do - and it's the only way any reputable mortgage broker can work - including me.
So, having said that - here's the ideal process regarding locking the rate.
Let's say you want to get 4.75% for a 30 year fixed conforming loan. In order to "lock" that rate, we must do several things.
First, fill out a loan application, including getting your signature on a "Borrower's Signature Authorization" form. Then we can run your credit score.
All the forms of the loan application must then be signed and returned.
Equally important, at this time we also want to receive all required documentation, like pay stubs, W2s, copies of bank statements, and possibly tax returns, etc. Depending on your cooperation, this can easily take several days - or maybe one day if you are prepared and responsive.
We order the title report, and we also order the appraisal. Note that as of May 1st, the lender now is in charge of the appraisal ordering process, by law. This can add a week to the process.
Then, if there is a Homeowner's Association, they must fill out a "Certification Form." They have up to 10 business days to do that. If there is any "Pending Litigation," then you cannot refinance at all. No sense locking a rate until we know that. (sad but true).
Then, the loan must be uploaded to the lender's website. That entails having my loan processing company work on your loan file, and fill out various forms, access the lender's site, and submit it. Assuming everything goes OK, this may take 24-48 hours, depending on backlog.
Once the complete loan file has been submitted, and we are confident on value, then and only then can we even consider locking. However, here is the next very important variable.
What is the lender's turn times? If they are taking 35 days to process the loan (which means from receiving the COMPLETE file to funding the loan), then it would be foolish to lock for 30 days upfront. There are some lenders who do not allow you to extend the lock. So, if you lock for 30 days, and it takes 31 days, you are out of luck. You have burned a lock, and are subject to all the penalties mentioned above. (Note - we try not to use those punitive lenders).
An acceptable strategy is to wait enough days into the lender's approval cycle so that you can then lock for 30 days (with the 30 day pricing) so you minimize the risk of not funding within the lock expiration date. This is just common sense.
Another, perhaps better strategy is to wait even longer until you are allowed to order docs, (meaning the loan has been COMPLETELY approved) and then you can lock and get the better 15 day pricing.
That's what I recommend to my clients. You might as well be rewarded for your discipline and patience. If you have any questions about this, do not hesitate to ask. All my clients are asked to read the above before we have any discussions about locking the rate.
