The Key to Your Lock
So you dial, the phone rings and the lender answers, “Thank you for calling ABCD Bank, how may I help you?”
“I heard your ad on the radio and I’d like to get that rate you just quoted.”
“We’d be happy to help. However, we can’t guarantee rates over the phone without an application, a credit report review and a new appraisal along with your paycheck stubs, tax returns and bank statements. Hello? Hello?...anybody there?”
Of course nobody’s there. You hung up on them. That low rate was an obvious bait-and-switch routine that you didn’t fall for. But was it?
When a mortgage lender lists their interest rates each day, they do so based upon a predetermined set of criteria. This criterion is either listed as fine print at the bottom of the ad or rattled off by some fast-talking disclaimer-type person. But the criteria is based upon a certain loan amount, a loan term, approved credit and so on. In other words, you have to meet certain things before a lender will guarantee you an interest rate.
This rate guarantee is called your rate lock. When a lender locks in your interest rate, it doesn’t change throughout the approval process, based upon a predetermine lock-in period. And lenders take locks very seriously. Just as seriously as you do.
When a lender agrees to issue a mortgage rate to you they essentially reserve an interest rate for you while they process and close your loan. If a lender reserves, or locks, your rate and your loan doesn’t close, it can cost the lender both in the short and long term.
That said, a lender won’t take a such a large risk on your mortgage without a thorough evaluation. Different lenders can have different lock policies but most lenders won’t lock in your mortgage loan unless they have a completed loan application and have reviewed your credit report.
In the past, there were lenders who would take a rate lock over the telephone without a loan application yet soon those lenders found that consumers would lock in at one bank and wait to see if rates dropped further and if they did the consumer would lock somewhere else. Some consumers would essentially “play the market” with other lenders money as they watched interest rates move up or down.
No longer. Mortgage lenders now require they have not only a complete loan application but have the loan documented as well. Interest rates are subject to credit scores, meaning the better the credit score the better the rate. If you tell your lender your credit is excellent and the lender’s rate for excellent credit is 3.50 percent the lender might lock you in but when your credit score is revealed to your lender and it’s 620 and not 750 then the lender is under no obligation to give you the 3.50 percent rate.
Lenders also consider available equity in a property as a data point to lock interest rates. The more equity in a property, the lower a rate may be. This is only determined after an appraisal. If you lock in at 3.50 percent and your appraisal comes in low, then a lender may not honor your rate lock based upon changed circumstances that occurred after you submitted your loan for approval.
These various rules for mortgage rate locks may seem a bit onerous but in reality they help keep mortgage rates lower for everyone by holding down costs to the lender. When you’re thinking of locking in your interest rate, make sure you’re eligible to do so with your lender. It makes a difference.