Lessons in Loan Lingo: What Does Locking In Your Rate Really Mean?
To the uninitiated, "locking a loan" sounds pretty final-- fiercely so. But actually, you’re not locked into the deal (not just yet, anyway). It’s just a term that makes the process more secure on both ends. Look at this way: as your loan application is going through the process of approval, federal interest rates could fluctuate. But if your loan is locked at a rate offered by your lender/broker and accepted by you, that’s a promise: that rate will still be available to you for the period of time specified in the contract.
Of course, that only serves you, the buyer, if interest goes up. You can’t renegotiate for lower interest if they go down, either—unless your loan falls through for some other and you start over—but by then, interest rates may have changed again. There’s an inherent gamble in trying to play this kind of market. If you choose not to lock your loan because you think interest is headed down, you could come out ahead; but just as easily, you could be kicking yourself.
How Long Does this “Lock” Stay in Place?
Your offer on a house will include the time period needed to close. For the buyer, that’s the time in which you inspect, appraise, make repair requests, and wait on your mortgage approval. The seller who agreed to your offer can also use time to make repairs, move out, whatever else needs doing on that end. Whatever the time period specified in your offer is most likely the same period your loan will stay locked.
Typically, locks last for 30-120 days. But if you’re asking for more time, you’re probably going to pay for it. If the original deadline passes and your lender hasn’t secured your loan, your lock expires. You may end up paying additional fees at this point, even if the breakdown isn’t really your fault. Safer loans these days are ones that build in longer than 30 days to close; but note: you may have to pay extra for longer closing periods, even though they really do serve both applicants and lenders when loans restrictions make streamlined processes nearly impossible.
One First Time Buyer’s Experience
When my husband and I were waiting for our loan, we hit a major snag. Our freelance income was found wanting, even though we’d been preapproved, pre-qualified, and generally given the green light by everyone—particularly our mortgage broker. We suddenly had to get the IRS to approve our 2012 taxes, though it was before the end of the tax season. Plus, honestly, the IRS isn’t known for having a lot of time on its hands to help every person immediately.
In trying to get this confirmation, I spent hours, days, weeks on the phone. Our original loan lock expired. We almost lost the house! But because in our case our broker had dropped the ball on advising us regarding our income, her firm ate the re-lock fee. (A very smart move on her part since if she hadn’t, I probably would have totally freaked out and blown the whole deal. Listening to IRS hold music for several hours a day wears on a person.) My advice then: make sure your income, debt and credit are 100% crystal clear to your lender before locking; this way, less is likely to go wrong in the process.
When Should You Lock?
You don’t have to lock just because your lender has approved you. You can wait until you’re in contract for a particular house, to limit the chance that the lock period will expire. But remember, gambling on lower future rates could backfire, particularly when they are so low already.
For further help, try speaking to a credit union, your Realtor® or a mortgage broker who can connect you to multiple lenders. These will be your most creative, least self-interested sounding boards. And of course, word of mouth is good (if those words coming out of those mouths are also good, of course). If you’ve got friends who used a broker and had stress free experience, that’s a big plus.
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Anna Marie Erwert writes from both the renter and new buyer perspective, having (finally) achieved both statuses. She focuses on national real estate trends, specializing in the San Francisco Bay Area and Pacific Northwest. Follow Anna on Twitter: @AnnaMarieErwert.