Last week’s article made the point that when borrowers cannot lock the price quote that was instrumental in their decision to select the lender, which is usually the case in the post-crisis market, the price they finally lock is more likely to be higher than the original quote than to be lower.
The major reason is that lenders can usually avoid reducing the price when a reduction is called for by a decline in the market price or by an upward correction of the borrower’s credit score. Most borrowers are content when the lock price is the same as the price they were quoted earlier.
The lock price can also be affected by corrections in property value and loan amount. The lender will replace the borrower’s estimate of property value 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.
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 a loan amount that places them at the top of an LTV band are highly vulnerable to a price increase resulting from even a small reduction in value.