Tuesdays Tip: How to "Lock" a Rate

The mortgage industry employs thieves, crooks, and scam artists. In the first three months of 2009 more borrowers are calling me with complaints about mortgage professionals than ever before. Part of me feels sympathy for those who are manipulated by these swindlers, while another part knows these borrowers are misinformed.

I always say that 95% of borrowers do not understand how to shop for a mortgage. The biggest problem is that people do not understand how a rate lock works. I receive at least a phone call a day from a borrower that says, "I have a quote for X rate with Y in closing costs". My first question is always the same "Is it a bank or a broker?" Most borrowers do not know the answer or the difference. I ask for two reasons: 1.) If it is a broker, we all have access to the same rates so I should be able to match or beat it, and 2.) If it is a bank, I want the borrower to get proof the rate is locked, otherwise the quote means nothing.

The American public is convinced that "written documentation", such as an email, letter, or initial loan document is hard evidence that cannot change. Unfortunately, in the mortgage industry this could not be more untrue. Very rarely, if ever, is the documentation I receive from a borrower with a mortgage application identical to the information relayed over the phone. In these cases, the information could completely change the loan terms agreed upon. Fortunately, this does not happen very often because I prepare my borrowers for any potential red flags that may affect the loan during our initial conversation. Other brokers and banks will keep those issues as a wild card to hedge against the mistake of not locking a rate or a blunder processing the loan. Here are just 4 tips that provide an "out" for the broker or bank:

• A difference of 1 point on a FICO score (credit score) could affect the rate by .5% or more (I.E., You say your score is 720 and you score is 719 the rate could change)


• A difference of $1 could affect the rate by .5% or more (I.E., You say the house is worth $500,000 and it is worth $499,999, your LTV (loan to value) changes and hence the rate may change)


• A different of $50 per month in gross income could prevent you from qualifying for the loan (I.E., You say your gross income is "around $80,000" and it is $79,000, your DTI (debt to income) may be too high and prevent you from qualifying for the loan)


• A difference of 1 month in your current employment could prevent you from qualifying for the loan (I.E., You say you've been working for your current employer for 2 years and a VOE (verification of employment) indicates you've been there 1 year and 11 months, the loan may be declined)

Your lock may completely change or be voided based on any of the above scenarios. My advice to borrowers is to obtain a lock sheet and a good faith estimate. These two documents are your best evidence the mortgage professional followed through with his or her obligation to lock the rate at your request. The GFE and lock sheet contain the terms of the lock which gives you something tangible to hold the broker or bank accountable if none of the information changes during the course of the loan. Furthermore, you must definitively ask for the rate to be locked. There is no such thing as "I implied..." in the mortgage industry. Following these steps will help eliminate potential discrepancies further into the loan process.

Shopping for a rate and the loan process are complicated. The top priority for a borrower should be finding a trusted mortgage professional who is willing to give the borrower the information he or she requests. Robert Frost says, “The woods are lovely, dark and deep. But I have promises to keep, and miles to go before I sleep." That being said, if you have any questions on the information above please feel free to contact me!

Make it a great day!