A lender may lock without a particular requirement being fulfilled but make that requirement a condition for the lock being retained. Hence, the list of conditions for retaining a lock is the same as the list of requirements to lock enumerated above.
Lenders are not very good at disclosing their requirements to lock, and there are no mandatory disclosures. The problem is compounded by an ambiguity in the Good Faith Estimate (GFE), which is a required disclosure of rates, fees, and other loan characteristics that must be provided to the borrower within three business days of the submission of a loan application.
At the time the GFE is issued, the loan may or may not be locked. If it is not locked, the rates and fees shown on the GFE are of value only as a history of what might have been. But not all borrowers understand this because nowhere on the GFE does it say, “The rate on your loan is not locked.”
One such borrower wrote me recently, attaching two GFEs to illustrate how the lender had tried to swindle him. The second revised GFE had a higher rate than the first GFE. The borrower did not understand that the rate on the first GFE was not locked.
Instead of saying that, the GFE states that “the interest rate for this GFE is available through XXX”, where the Xs are a date, and if the loan is not locked, the lender indicates that by entering the date the GFE was prepared rather than some future date. It is understandable why a borrower may not grasp this round-about way of stating that a loan is not locked.
The fact is, it eluded me. When I wrote an article earlier this year praising the new GFE as a marked improvement over the old one, I had not caught on to this problem. That article will be updated. At least one lender I know has its own lock disclosure form that clarifies what the GFE obscures.
What is a borrower to do? Step one is to get the lender to clarify its ground rules for locking, preferably in writing. They should provide a set of general rules upfront, which might become more precise after you have submitted an application.
Step two is to take charge. All of the requirements to lock listed above except the appraisal and title report apply to documents that you provide. If the lender is willing to make the two exceptions conditions for retaining the lock rather than requirements to lock, which most of them will, you have control over when you can lock. Alert borrowers will submit the required documentation with the application.
Step three is to protect yourself. The prices you lock are those quoted by your lender after you have been cleared to lock, not the prices quoted to you when you selected him.
The initial price quotes probably compared favorably to the prices quoted by other lenders, but the lock prices may be a different story. If you have no way to verify that they are competitive, given your investment in the transaction, your lender may be tempted to game you.
The lock price should be the same as the price the lender would quote to your twin brother initiating the exact same deal on the lock day. If you can price your deal on the lender’s Web site, you can’t be gamed.
As a fall-back, you can use my daily series on wholesale rates to measure the change in market rates between the day you received your initial quote and the lock day for the same type of mortgage. It is not exact, so don’t quibble about a small difference, but if the lender says that the rate has gone up by .25% over a period during which the wholesale rate did not change, you know you are being gamed.