May 5, 2015

You have identified the mortgage lender with whom you wish to work, based at  least in part on a price quote. You probably know that the price quote doesn’t mean anything until it is locked, but few borrowers know all the steps required to get to the lock, and the possible costly missteps in the process. The rules and procedures surrounding the lock process vary from lender to lender and are not subject to any mandatory disclosure requirements.

To help borrowers avoid the potential missteps in the process, this article presents 5 questions you should pose to a lender before proceeding further.  If the answers aren’t satisfactory, look elsewhere.

When You Finally Clear Me to Lock, How Do I Know I Am Getting the Right Price at That Time? This is the most important question you will ask. When you have been cleared to lock, you will have made a commitment to the transaction by investing time and money, and backing out of it to begin again with a different lender would be costly -- in some cases prohibitively costly. Some lenders systematically take advantage of that to pad the price.

The lock price should be the lender’s posted price on the lock day. Posted prices are those the lender delivers to its loan officers, telemarketers and other employees or agents authorized to offer the lender’s products to the public. If the lock price is the lender’s posted price, then it is identical to the price that would be quoted to your twin sibling shopping a transaction identical to yours on your lock day. I sometimes call this the “twin sibling rule”.

The best assurance the lender can give you is that on the lock date you can price your transaction on the lender’s web site, or on a third party site such as mine in which the lender participates. Unfortunately, all too few lenders use this approach. If you have direct contact with an obliging loan officer (LO), your need might be satisfied with a hands-on demo of the pricing of your transaction on the LO’s laptop. You should determine whether that will work for you at the outset of the transaction. If the lender’s method of communicating the price is to report it orally over the telephone, say goodbye then and there.

What Are Your Requirements to Lock? Because locking imposes a cost on lenders, they don’t want to do it unless they are reasonably certain that the loan will go through. Their inclination is to take the time needed to be sure. Your interest, in contrast, is to lock ASAP. The longer a lock is delayed the greater the risk of an unaffordable rise in market interest rates, and if you are financing a home purchase with a set closing date, the weaker your capacity to back out and seek another lender. And when there is no time to go elsewhere, you have no bargaining power in connection with any issues that might arise.  

The lender will almost always require that the loan application be approved, the key issue being what the lender needs before granting approval. The most troublesome areas are income documentation and property value documentation, either of which can take considerable time.  Before the financial crisis, these were often waived, facilitating the locking process, but there are few waivers today.

The lender should indicate the requirements for both income and property value documentation. The first is particularly important if you are self-employed or draw income from real estate investments. The second is the most common source of  processing delays. If the lender will approve the loan early contingent upon an appraisal being above some minimum value, it is important that you judge the likelihood of that value as high.

How Much Will it Cost Me to Lock?  It is common to charge a modest fee for processing and locking a loan. On my site, lenders are allowed to charge $295 which is non-refundable if the borrower walks but is credited back to them when the loan closes. The largest investment the borrower must make is the appraisal, which can range from $300 to $800 depending on the property. That is not refundable if the loan doesn’t close but it does not go to the lender.

What Exactly Does the Mortgage Lock Cover?  Locks should cover the interest rate, points, and all other lender fees. On ARMs the lock should include the maximum rate, margin, index and adjustment caps. The coverage of the lock will be shown on the lender’s Lock Confirmation Statement, which you should ask for upfront.

What Happens If The Loan Cannot Be Closed Within The Lock Period? I put this last because all lenders use the same general rule: if the delay is the lender’s fault, the lock period is extended at no cost to the borrower, and if the delay is the borrower’s fault, the lender will charge the borrower for a lock extension. The charge should be spelled out by the lender, along with the borrower’s obligations to avoid being at fault. In the event of a dispute, the lender is the final judge of where the fault lies – except on my site where the lenders agree to accept my judgment.