Rate Locks Sometimes Unlock:
Here Are Some Tips on Protecting Yourself
Here Are Some Tips on Protecting Yourself
A rate lock is a commitment by a
mortgage lender to lend a stated amount to a specified
borrower posting a specified property as collateral, at a
stipulated interest rate and points. An important proviso is
that the loan must be closed within a specified “lock
period”, which is usually 15 to 60 days. The lock protects
the applicant against the possibility of a rise in market
rates during the lock period that would make the mortgage
less attractive and possibly unaffordable. With
interest rates inching upward, questions about the
reliability of locks will arise with increasing frequency in
the months ahead.
Property Appraisals as a Lock Disrupter
The price of a mortgage varies with the ratio of
loan amount to property value, or LTV. Since the price is
often locked before the property has been appraised, the
value used will be the sale price if it is a purchase
transaction, or the owner’s estimate of value if it is a
refinance. If the appraisal then comes in at an amount that
is materially lower or higher than the value used in setting
the lock price, it may invalidate the lock. This recent
letter illustrates the problem.
“I am refinancing my mortgage and locked at 4%
with $1700 in total closing costs. But the appraisal came in
at $411,000 instead of the $422,000 I had estimated, on the
basis of which the rate was raised to 4.125%. Is this
justified, or am I being taken advantage of?”
On the face of it, the answer to this borrower’s
question was not obvious. The lower appraisal raised the
LTV, which gave the lender an excuse for raising the rate. A
closer look, however, reveals that the rationale was
spurious because the low appraisal did not move the
transaction into a new price category.
The LTV pricing categories are: 75.1-80.0;
80.1-85.0; 85.1-90.0; 90.1-95.0; and 95.1-97.00. Both the
initial price based on an 88% ratio, and the new price based
on a 90% ratio fell in the 85.1 – 90.0 pricing category, so
the price should not have changed.
While the borrower in this case was certainly taken
advantage of, more borrowers are exploited by appraisals
that come in higher than the previous estimate. If
the appraisal in the example had come in at $436,000 instead
of $422,000, the LTV would have been 84.8, dropping it into
the 80.1-85.0 pricing category, which should result in a
lower price. Had this happened, the lender could have
cheated by doing nothing, which is a temptation that is very
hard to resist.
Bottom line, the borrower’s best defense against
the possibility that the property appraisal will negate the
rate lock is to compare the LTVs based on the original price
estimate and on the appraisal to see if they fall into
different pricing categories.
Note that if borrowers rather than lenders ordered
appraisals, they would do it before seeking a loan, so they
would not have to guess the property value in shopping
lenders or in negotiating a rate lock. The potential
disruption caused by appraisals arriving late on the scene
is just one of the costs of the dysfunctional practice of
placing control of property appraisals with the lender
rather than with the borrowers who pay for them.
Expiration as a Disrupter
Probably the most important source of lock
disruption is a failure to get the loan closed within the
lock period. Such failure usually means that important
information bearing on the acceptability of the property or
the borrower was not received in time. Lenders will extend
the lock without charge if they are responsible for the
delay. They may have taken too long to process and
underwrite the loan, or failed to identify missing
information in a timely matter so that the borrower could
provide it within the lock period.
In most cases, however, the applicant is
held responsible and the lender’s lock commitment expires.
If the lock expires, any new lock will be at the prices
prevailing at that time.
The applicant is presumed to be responsible for the
failure to close on time because documenting the
acceptability of the applicant’s finances and property is
the responsibility of the applicant. When the loan
application and supporting documents emerge from the office
of the underwriter who has examined them, it is either
approved, which makes it ready to close, or it may be
approved subject to the provision of additional documents.
The list of required documents is provided to the applicant.
Needless to say, responsibility for failure to
close can be a contentious issue. For that reason, the
lenders who offer mortgages through my web site agree to
accept my judgment as ombudsman if a disagreement arises on
responsibility for a failure to close on time. I have
delegated the function to my colleague Jack Pritchard, who
was a mortgage banker for many years and knows all the
tricks of the trade. Jack has adjudicated numerous disputes
connected to lapsed locks.
Bottom line, borrowers with or without access to an ombudsman can best protect themselves by providing all documents requested by the underwriter ASAP, and by keeping a log showing the date on which each document was provided.