“Mortgage interest rates are currently at record lows, and it would seem
that they couldn't possibly fall any lower. Would you recommend, then,
that borrowers obtain a rate lock as soon as they begin the process of
shopping for a mortgage?”
Two days after receiving this letter,
rates dropped another 1/8%! Nonetheless, the writer’s major point, that
at current rate levels there is much greater potential for rate
increases than rate decreases, is valid. And that is a good reason for
locking ASAP. But it is not the only reason, as indicated by this
reader.
“While comparing two
lenders, the first lender sent me the GFE and TIL and locked us
immediately upon receiving the memorandum of terms of the house
purchase. The second lender gave us a rate quote via e-mail that was
1/8% less than that of the first lender for the same lender fees, so we
cancelled our lock with the first lender.
But then the second lender
told me he needed the signed purchase contract before he could lock,
which took one day. Then he told me he needed additional verification of
my income, which took two more days. Next he told me that he needed an
appraisal, which took more time. By the time he was prepared to lock,
the market had changed and both the rate and fees were higher than those
offered by the first lender. We had no choice except to close with the
second lender.”
This reader locked
immediately, then walked away from the lock because he thought he could
do better, only to learn (at considerable cost)
the difference between a
price quote and a price lock.
His experience suggests another reason why it is a good idea to lock
ASAP: lenders who deliberately
drag out the lock process may be playing with a stacked desk.
The lender who won’t lock until he has
all the data is positioned to cheat. He can “low-ball”, quoting a price
below what he can deliver and to which he cannot be held, the intent
being to snare the borrower. He can then raise the price when the
borrower is committed and it is too late to back out.
In all probability, the second reader was
ripped off in that way. Note that such rip-offs depend on the borrower
not being able to check the validity of the quoted prices.
This view that reliable
lenders will lock quickly was confirmed by my locking guru, Jack
Pritchard. In most cases, he says, the borrower’s credit and a
computerized estimate of property value can be obtained within a few
minutes, while the borrower’s income can be verified or at least checked
for reasonableness within the day. These are the critical factors
involved in a lock.
That does not mean that an
honest lender will always provide an immediate lock to any loan
applicant. Because locking imposes a cost on the lender, no lender wants
to lock a loan that is unlikely to close. If the initial information
available to the lender indicates that the borrower may not qualify for
the requested loan at the posted price, the lender won’t lock. In that
situation, the borrower must decide whether the lender has a valid
reason for delaying the lock, or is using delay as a tool for gaining a
strategic advantage.
There is only one reliable
way to answer that question, and that is to determine whether the lender
offers an objective method of disclosing its loan prices. If a price is
communicated orally, or in an email letter, the borrower should assume
that the lender is trying to game him with the delay.
On the other hand, if the
borrower can find her price on the lender’s web site, there is no
strategic advantage to the lender in delaying a lock, because the
borrower can check any future lock price. It may be higher or lower than
the price on the day a lock was first requested, depending on which way
the market has moved, but it is the correct price on the day the loan is
finally locked. Providing such pricing objectivity was a major reason I
developed the Upfront Mortgage Lender certification.
If you are dealing with a
loan officer who can’t give you a same-day lock, and if you can’t price
your loan on-line, you should shift the burden of proving objectivity to
the loan officer. All loan officers today have computer access to the
lender’s posted prices and can print the page showing your price. Ask
for that page on the day you receive your initial price quote – it will
be your assurance that you have not been low-balled. And ask for a
commitment that you will receive an updated version when your loan is
finally locked.
Such objectivity in
pricing disclosure should also come into play in the event that a price
lock is nullified when new information received by the lender
invalidates the information on which the lock is based. That happens
occasionally when an appraisal comes in unexpectedly low, or there is a
hit to the borrower’s credit score. In such case, the burden should be
on the loan officer to document the validity of the new price.
Bottom line, “LOCK ASAP” is a good rule
in today’s market, but to make it work effectively, it should be
accompanied by another rule: “MAKE THE LENDER DOCUMENT YOUR PRICE.”