Speed Up Your Mortgage Lock-In

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Mortgage rates are inching up and many experts think the process will continue. It’s all the more important, then, to proceed with caution when locking in a loan rate.

To make this threading-the-needle decision even harder, lenders are taking longer to approve loans, and may also delay approval of the lock-in, leaving the borrower in limbo.

Jack M. Guttentag, emeritus finance professor at The Wharton School, says his mortgage-advice website has been flooded with borrowers’ complaints about the lock-in process, which used to be easy.

“Most complaints arise out of lock delays – the borrower requests a lock today but it isn’t provided until days or weeks later,” Guttentag says. “Such delays involve risk to the borrower that the market rate will increase, or that the lender will claim it has.”

Lock delays and sluggish loan processing put the homebuyer at risk of missing the closing date fixed in the purchase contract, possibly derailing the purchase of a home or property. You can try to compensate by setting a closing date further in the future, but the seller may then reject your offer.

What’s causing these delays? A big factor, says Guttentag, is tighter lending standards following the financial crisis. “Before the crisis, income and asset documentation as well as appraisal requirements were often waived, facilitating the locking process,” he says. But, “there are no waivers today."

“Underwriting requirements also tightened significantly after the crisis. More time is spent in assuring that the requirements are met, and more loans are being rejected. Lenders don’t want to incur the costs of locking loans that they subsequently are forced to reject. To minimize the likelihood of this happening, they require more information before they lock, which takes time,” Guttentag says.

Lenders, for example, want to be absolutely sure the property’s value is high enough to serve as collateral for the loan. While they were casual about this a few years ago, they now often require an appraisal before approving a lock.

Many borrowers incorrectly assume that the loan terms such as rate, points and closing costs detailed in the lender’s Good Faith Estimate, or GFE, are locked in, but they are not.

Borrowers don’t have to worry too much about delays when rates are flat or falling, but now they are rising. The average 30-year fixed-rate loan now charges 4.72%, according to the BankingMyWay survey, up about half a percentage point since early November.

Guttentag suggests that borrowers take three steps to protect themselves:

•    Ask the lender to describe its lock-in rules in writing. If you can’t get a clear picture, use the mortgage shopping tool to find other lenders.

•    Get all the required documents to the lender as soon as possible – ideally when you submit the loan application. Most documents, such as proof of income and assets, are submitted by the applicant. The main exceptions are the appraisal and title report, which can be done after the loan application process begins. Try to find a lender who will set the lock terms before receiving these documents, rather than the other way around.

•    Keep an eye on rates and other terms during the period between your request to lock and its approval. There’s no guarantee you will get the terms quoted at the time you selected the lender. You can lock terms in only after you have been cleared to do so, and your choice will be limited to the terms available at that time.

Amidst this uncertainty, it would make sense to have a back-up plan with another lenders you have already researched in case your first choice ends up denying you the deal you’d expected. Also, it may be worth it to pay a fee to lock in for longer than the standard 30 to 60 days.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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