|When youíre looking for a
mortgage, youíre 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, youíll 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 brochure explains what these
All About Lock-Ins
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 should not rely on the
terms quoted to you when shopping for a loan unless a
lender is willing to offer a lock-in.
What Is a Lock-In?
A lock-in, also called a
rate-lock or rate commitment, is a lenderís promise to
hold a certain interest rate and a certain number of
points for you, usually for a specified period of time,
while your loan appli≠cation is processed. (Points are
additional charges imposed by the lender that are
usually prepaid by the consumer at settlement but can
sometimes be financed by adding them to the mortgage
amount. One point equals one 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
A lock-in that is given when you
apply for a loan may be useful because itís likely to
take your lender several weeks or longer to prepare,
document, and evaluate your loan application. During
that time, the cost of mortgages 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 lenderís promise to make you
a loan in a specific amount at some future time.
Generally, you will receive the lenderís 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 lenderís conditions for
making the loan such as receipt of a satisfactory title
insurance policy protecting the lender.
Will Your Lock-In Be
Some lenders have preprinted
forms that set out the exact terms of the lock-in
agreement. Others may only make an oral lock-in promise
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
under≠stand 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 lenderís lock-in
form to read carefully before you apply for a loan. If
possible, show the lock-in form to a lawyer or real
It is wise to obtain written,
rather than verbal, lock-in agreements to make sure that
you fully understand how your lenderís 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.
Will You Be Charged
for a Lock-In?
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 per≠centage
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.
What Options Are
Available for Set≠ting the Mortgage Terms?
offer different options in establishing the
interest rate and points that you will be
charged, such as:
Rate--Locked-In Points. Under this
option, the lender lets you lock in both the
interest rate and points quoted to you. This
option may be considered to be a true lock-in
because your mortgage terms should not increase
above the interest rate and points that youíve
agreed upon even if market conditions change.
Locked-In Interest Rate--Floating Points.
Under this option, the lender lets you lock in
the interest rate, while permit≠ting or
requiring the points to rise and fall (float)
with changes in market conditions. If market
interest rates drop during the lock-in period,
the points may also fall. If they rise, the
points may increase. Even if you float your
points, your lender may allow you to lock-in the
points at some time before settlement at
whatever level is then current. (For instance,
say youíve locked in a 10Ĺ percent interest
rate, but not the 3 points that went with that
rate. A month later, the market interest rate
remains the same, but the points the lender
charges for that rate have dropped to 2Ĺ. With
your lenderís agreement, you could then lock in
the lower 2Ĺ points.) If you float your points
and market interest rates increase by the time
of settlement, the lender may charge a greater
number of points for a loan at the rate youíve
locked in. In this case, the benefit you might
have had by locking in your rate may be lost
because youíll have to pay more in up-front
Floating Interest Rate--Floating Points.
Under this option, the lender lets you lock in
the interest rate and the points at some time
after application but before settlement. If you
think that rates will remain level or even go
down, you may want to wait on locking in a
particular rate and points. If rates go up, you
should expect to be charged the higher rate.
Because practices vary, you may
want to ask your lender whether there are other options
available to you.
How Long Are Lock-Ins
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 to 60 days are com≠mon. But some lenders
may offer a lock-in for only a short period of time (for
example, 7 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
contin≠gencies imposed by the lender, before the 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 writ≠ing, if possible) the time needed to
process your loan. Youíll also want to take into account
any factors that might delay your set≠tlement. 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
con≠struction delays. Finally, ask for a lock-in with as
few contingencies as possible.
What Happens If the
Lock-in Period Expires?
If you donít 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.
How Can You Speed Up
the Approval of the Loan?
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
The purchase contract
for the house (if you donít have the contract,
check with your real estate agent or the
bank account numbers, the address of
your bank branch and your latest bank
statement, plus pay stubs, W-2 forms,
or other proof of employment and salary, to help
the lender check your finances.
||If you are
self-employed, balance sheets, tax returns
for 2-3 previous years, and other
information about your business.
Information about debts, including loan and
credit card account numbers and the names
and addresses of your creditors.
of your mortgage or rental payments,
such as cancelled checks.
Certificate of Eligibility from the Veterans
Administration if you want a VA-guaranteed loan.
Your lender may be able to help you obtain this.
Be sure to respond promptly to
your lenderís requests 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.
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Ask About Lock-Ins
When youíre ready to settle on
your loan, youíll want to get the loan terms that youíve
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 infor≠mation when you shop for a loan:
Knowing what to look for puts
you in a better position to decide whether, when, and
how long to lock in mortgage terms. Also, 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 agree≠ment with the lender. If that effort
fails, con≠sider writing to the appropriate state or
fed≠eral regulatory agency.
Some lender actions, such as
offering lock-≠in terms which are impossible to fulfill,
fail≠ing to process your loan diligently, or caus≠ing
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.