Refi Roadmap: A Locked Rate Isn’t a Closed Loan


Rates are bouncing around near record lows set last October and consumers
are looking to seize the opportunity. There’s always a rush by consumers and
loan agents to lock rates on dips, and that practice is all the more
prevalent when extreme daily rate swings raise the sense of urgency.

But before you take the ready-fire-aim approach, remember the old saying:
haste makes waste. Just because a rate is locked doesn’t mean the loan will
close. Here’s how you can make sure that it does.

Let Lender Run Your Credit Score: Credit bureau
scoring models know people shop for mortgages, so more than one
mortgage-related credit run in a 30 day window won’t reduce your score. Many
critical loan approval factors are built into a credit report, so a lender
should run your credit before the rate lock—even if you’ve worked with
that lender before. Your rate is predicated on the credit score, and scores
fluctuate daily as you use credit cards. Credit reports also show current
balances on housing and all other debt, and these balances can impact
qualifying. Credit reports also show any derogatory items on your credit
history, including recent creditor mistakes you may not know about—these
are common, and you’re guilty of creditor mistakes until you prove you’re
innocent. Most lenders can help here, but it takes time so running credit
should be first in the process.

Tell Lender About Job, Income, Asset Changes: If
you’re working with a lender for the first time, of course you must provide
a full financial profile along with paystubs, tax returns and bank
statements to back it up. But if you’re working with a lender you’ve already
worked with, never assume the documentation process is any different.
Tell them everything when you talk about rates. Have you changed jobs or
titles? Did you not get your bonus this year? Or was it bigger? Did you
spend all your savings on a vacation or new car? Or will you in the next 60
days? All banks approve loans based on your debt-to-income ratio, and these
factors all go into the calculation. The debt comes from the credit report
and tax returns, and the income comes from paystubs, tax returns and bank

Provide All Documentation Immediately: Provide this
documentation right away even if a busy loan agent doesn’t ask for it right
away. The only exception to this rule is if the loan agent explicitly tells
you they’re doing a special refinance that doesn’t require documentation
because of some certain bank or government program.

Your Property Must Qualify: It’s not enough for your
credit score and debt-to-income ratio to qualify you. The property must also
qualify. First, there must be enough equity in your home. Due to appraisal
rules that prevent loan agents from pre-screening home values with
appraisers, you usually have to pay for an appraisal up front to find out if
you have sufficient equity. Second, the lender may require any big deferred
maintenance issues like rotting wood, chipping paint, water damage or signs
of water damage to be fixed before the loan closes—this is another timing
issue that affects rate locks, so tell your lender if you have maintenance
issues. And if you’re in a condo, the condo building must have at least 51%
owner-occupancy, a healthy budget with no (or at least well-explained and
documented) special assessments, no litigation, no single owner holding more
than 10% of units, and no more than 20% commercial space (or 25% for FHA).

Don’t Forget Your Second Mortgage!: If you have a
second mortgage, the second mortgage holder must agree to ‘subordinate’
behind a new first mortgage before the new mortgage can close. Whether or
not the second mortgage is with the lender handling the refi, this
subortination review and approval adds time to the process, sometimes weeks.
As such, see ‘Is Your Rate Locked For Long Enough’ below. And zero-balance
Home Equity Lines of Credit (HELOCs) follow these same rules. Even if
there’s a zero balance, the HELOC holder must approve the subordination.

Incorrect Loan Balances Blow Rate Locks:  Setting your
refi loan amount is related to credit reports and the ‘Cost Or No-Cost
Refinance’ section below. Your credit report will show your existing loan
balance, and if you choose a refi with closing costs, you need to choose
whether you’re paying cash or adding costs to the new loan. If loan agents
are locking rates too quickly, here are a couple ways it can blow up the
process: (1) they forget to account for existing loan payments you just made
or will make during the refi process, then they find out when you’re signing
final papers and you have to restart—which can blow your rate lock, or (2)
they assume your property will appraise for a certain amount and if your
value comes in low, they have to redo the loan amount—which can cause you
to have a higher rate or fees, or you might have to pay your loan down in
order to qualify.

Cost or No-Cost Refinance?: If you think rates will
drop more, it’s best to do a no-cost refinance so that you can refinance
again later without having fees wash out the lower-rate benefit. If you
think rates are as low as they can go, it’s best to do a refinance with
normal fees ($2500-4500 depending on your market) and perhaps ‘buy your rate
down’ by paying tax deductible points (a ‘point’ is 1% of your loan amount).
On a no-cost transaction, lenders offset your closing costs by offering a
slightly higher rate, usually .125% to .25% higher.

What Is The Rate Outlook?: The U.S. and global
economies are in uncharted territory given mass post-crisis government
stimulus spending, so even the best market oracles don’t know how rates will
play. But here’s what we do know: rates drop when mortgage backed securities
(MBS) rise, and MBS are at all-time highs because
they’re one of the best safe havens for global investors rattled by market
uncertainty. This is why rates are at record lows. MBS are priced for a very
weak economic outlook. Any signs of improvement will cause MBS to sell and
rates to rise.

Getting Rate Quotes: Even the best rate websites
like MortgageNewsDaily aren’t a substitute for a rate quote. As noted in the
‘Cost or No-Cost’ section, there’s a direct relationship between rates and
fees, so a rate quote will depend on your objectives and it can only be
provided to you by a lender. Always insist on a full written term sheet
displaying the rate, term (e.g., 30yr fixed), every single line item closing
cost, total monthly costs including insurance and taxes, and total
cash-to-close or cash-in-hand at closing. Lenders are required by Federal
law to give you a three-page Good Faith Estimate but this form is a joke
because it doesn’t show you all of your line items, nor your total monthly
cost, nor your cash-to-close. So make sure your lender shows this to you in
some written format before you lock a rate.

Is Your Rate Locked For Long Enough?: Banks are busy
during these rate dips and quoted rates can only be locked for a certain
number of days. Ask your loan agent when they expect to close your loan, and
if their quoted rate lock is enough time to get the deal done. Also refer
back to the ‘Provide All Documentation Immediately’ section above, so you
can hold the loan agent’s feet to the fire if the delays are on their end
and not yours.

Your Rate vs. Headline Rates: Every Thursday Freddie
Mac publishes a rate survey from the previous week. This is source material
for virtually all media. In addition to the fact that those rates are
expired by the time you’re reading about them, there’s lots of fine print the headlines don’t catch
including: those rates are only for loans to $417k, single family homes
only, owner-occupied only, and most of those loans have .7% to .8% in points
(aka extra fees). Rates on this website are more timely, but
again, a rate quote is based on your profile and your property profile so it
must come from a lender to be specific.

What If Rates Drop More During Loan Process: When
you lock a rate, you’re setting that rate then the market will go up or
down. It’s very much like buying a stock. The main difference is that
lenders have what they call ‘renegotiation’ policies if rates drop after
you’ve locked. All renegotiation policies are similar in that rates have to
drop significantly for you to be able to capture some of that drop after
you’ve already locked a rate. Bottom line: renegotiations don’t let you
capture the entire gain because you’ve already made a commitment. So as an
example, if you locked a rate at 4.75% and the quoted rate for that same
unlocked loan a week later dropped to 4.5%, most lender renegotiation
policies will give you half of the gain which would put you at 4.625%.

Julian Hebron is San Francisco branch manager and a top producer for RPM Mortgage and also runs mortgage and housing blog The Basis Point.

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