"Mortgage interest rates are currently at record lows, and it would seem that they couldn’t possibly fall any lower. Would you recommend then that borrowers obtain a rate-lock as soon as they begin the process of shopping for a mortgage?"
Two days after receiving this letter, rates dropped another 1/8 percent! Nonetheless, the writer’s major point, that at current rate levels there is much greater potential for rate increases than rate decreases, is valid. And that is a good reason for locking ASAP. But it is not the only reason, as indicated by this reader.
"While comparing two lenders, the first lender sent me the GFE (Good Faith Estimate) and TIL (Truth in Lending Act disclosure) and locked us immediately upon receiving the memorandum of terms of the house purchase. The second lender gave us a rate quote via e-mail that was 1/8 percent less than that of the first lender for the same lender fees, so we canceled our lock with the first lender.
"But then the second lender told me he needed the signed purchase contract before he could lock, which took one day. Then he told me he needed additional verification of my income, which took two more days. Next he told me that he needed an appraisal, which took more time. By the time he was prepared to lock, the market had changed and both the rate and fees were higher than those offered by the first lender. We had no choice except to close with the second lender."
This reader locked immediately and then walked away from the lock because he thought he could do better, only to learn (at considerable cost) the difference between a price quote and a price lock. His experience suggests another reason why it is a good idea to lock ASAP: Lenders who deliberately drag out the lock process may be playing with a stacked deck.
The lender who won’t lock until he has all the data is positioned to cheat. He can "lowball," quoting a price below what he can deliver and to which he cannot be held, the intent being to snare the borrower. He can then raise the price when the borrower is committed and it is too late to back out. In all probability, the second reader was ripped off in that way. Note that such rip-offs depend on the borrower not being able to check the validity of the quoted prices.
This view that reliable lenders will lock quickly was confirmed by my locking guru, Jack Pritchard. In most cases, he says, the borrower’s credit and a computerized estimate of property value can be obtained within a few minutes, while the borrower’s income can be verified or at least checked for reasonableness within the day. These are the critical factors involved in a lock.
That does not mean that an honest lender will always provide an immediate lock to any loan applicant. Because locking imposes a cost on the lender, no lender wants to lock a loan that is unlikely to close. If the initial information available to the lender indicates that the borrower may not qualify for the requested loan at the posted price, the lender won’t lock.
In that situation, the borrower must decide whether the lender has a valid reason for delaying the lock, or is using delay as a tool for gaining a strategic advantage.
There is only one reliable way to answer that question, and that is to determine whether the lender offers an objective method of disclosing its loan prices. If a price is communicated orally, or in an e-mail letter, the borrower should assume that the lender is trying to game him with the delay.
On the other hand, if the borrower can find her price on the lender’s website, there is no strategic advantage to the lender of delaying a lock, because the borrower can check any future lock price. It may be higher or lower than the price on the day a lock was first requested, depending on which way the market has moved, but it is the correct price on the day the loan is finally locked.
Providing such pricing objectivity was a major reason I developed the Upfront Mortgage Lender certification.
If you are dealing with a loan officer who can’t give you a same-day lock, and if you can’t price your loan online, you should shift the burden of proving objectivity to the loan officer. All loan officers today have computer access to the lender’s posted prices and can print the page showing your price.
Ask for that page on the day you receive your initial price quote — it will be your assurance that you have not been lowballed. And ask for a commitment that you will receive an updated version when your loan is finally locked.
Such objectivity in pricing disclosure should also come into play in the event that a price lock is nullified when new information received by the lender invalidates the information on which the lock is based. That happens occasionally when an appraisal comes in unexpectedly low, or there is a hit to the borrower’s credit score. In such case, the burden should be on the loan officer to document the validity of the new price.
Bottom line, "lock ASAP" is a good rule in today’s market, but to make it work effectively, it should be accompanied by another rule: "Make the lender document your price."