Preparing to Lock
Monitoring Your Price. Your price is not final until it is locked by the lender and you have received a lock confirmation statement. Until that happens, your price will change as the market changes. You can track such changes by hitting Check Price in your File Cabinet. Leave Your Inputs unchanged so that any price change reflects market changes.
Your price can also change because the lender has not been able to verify one or more critical pieces of information, and has corrected them. You can track the impact of such changes on your price by comparing the price you get with your current inputs with the price using the corrected inputs. Do these calculations one immediately after the other so that the results are not affected by changes in the market.
Communications From the Lender. Information that verifies or corrects what you entered in Your Inputs may be received informally from the loan officer, possibly the same day in which you made your lender selection, or the next day. The loan officer could also clear you to lock, or indicate that more checking is required.
There is also a formal submission of documents to you that must occur within 3 days of receipt of your application. The documents you receive include a corrected loan application returned for your signature, a credit score disclosure, and a Good Faith Estimate (GFE). In most cases, you will be cleared to lock at this point, although sometimes the lender won’t lock until the property has been appraised.
These communications will include corrections that might influence the price. The most critical items are the credit score and property value.
Credit Score: The score that is used to price your loan is the one received by your lender, not the one that has been obtained by you. There could be a difference large enough to affect the price.
There are a number of scoring models from which your lender has a choice. Each of the three major credit repositories has its own model, with multiple versions. Fannie Mae and Freddie Mac list 20 model versions they will accept from lenders. Usually lenders pull scores from three models and use the middle one, or they pull two and take the lower one.
The different models generate scores that are different but usually they don’t differ by much. If one model score is 750, another won’t be 650, but it might be 740. Even a small difference, however, might be enough to affect the price.
The impact of credit score on price is based on score ranges that are 20 points wide on the most widely used FICO score models. The ranges are 620 to 639, 640 to 659… 780 to 799, and above 800. This means that if the score you placed in Your Inputs is near a break point, it takes only a small downward correction to drop you into a lower score bracket that could raise your price. An example would be a shift from 620 to 619. By the same token, if the score you entered was 639, an increase to 640 would shift you into a higher category. If this called for a price reduction, you would see it when you entered the corrected score in Your Inputs and derived the new price. Your lender would honor that price. When it happens anywhere else, lots of luck.
Property Value: This is the most problematic factor affecting the price of your mortgage. The lender will replace the value you entered in Your Inputs with a figure drawn from an automated valuation program, but that figure could be adjusted later – perhaps a number of weeks later – when an appraisal becomes available. The appraised value is the final word.
Changes in property value may affect the price by shifting the ratio of loan amount to property value (called the “LTV”) into a higher or lower band. These bands are 65.01 to 70, 70.01 to 75, 75.01 to 80, 80.01 to 85, 85.01 to 90, and 90.01 to 95. Borrowers who take the largest loan possible with their property value are at the top of the LTV band, which makes them highly vulnerable to a price increase resulting from even a small reduction in value.
For example, a borrower who believes his house is worth $100,000 and applies for a $90,000 loan has an LTV of 90%. If the lender corrects the value to $99,000, the LTV jumps to the next highest band, which requires a higher price – or perhaps outright rejection. To remain at an LTV of 90%, the loan amount must be reduced to $89,100, which requires a down payment increase of $900.
Of course the corrected property value can be higher than the borrower’s estimate, but if the borrower is at the top of the LTV band, the value increase required to shift him into a lower LTV band must be large. To shift the borrower in the example to an 85% LTV requires a corrected property value of $105,883, or a value increase of almost 6%. This can happen, and if the borrower is using this site, the mortgage price will drop accordingly. But don’t expect it anywhere else.
Loan Amount: The borrower at the top of an LTV band is also in danger of being forced into the next highest band if she doesn’t have the cash to cover unanticipated settlement costs, including escrows. For example, if the borrower at an LTV of 90% in the example must add $500 to the loan in order to cover an unanticipated expense, the LTV would jump to 90.5%, which places her in the higher band.
Suggested Additional Reading: Shrewd Mortgage Borrowers Know Their PNPs.