Housing Counsel: Locking in Your Mortgage Loan

Written by Posted On Sunday, 23 April 2006 17:00

Question: We signed a contract to purchase our first home last week, and settlement is scheduled for mid-May. Before the contract was signed, we took your advice and shopped around for the best mortgage. After the real estate contract was signed, we immediately contacted the lender we had selected, and made a formal application. The lender asked us if we want to lock in the interest rate.

Since this is our first house, and we have absolutely no understanding of the way the mortgage market works, we did not understand his question. He explained that if we "lock in" by signing a document called "Loan Lock-in," the rate the lender quoted would be guaranteed, so long as settlement takes place by the time specified in the sales contract

We know that interest rates are on the rise. Will this "lock in" document protect us?

Answer: A "lock-in" agreement will be your best protection, but all terms and conditions must be spelled out clearly and the document must be in writing.

It has been several years since I received this kind of question. In the past few years, mortgage interest rates have been at their all-time low. So potential borrowers were satisfied with their under 6 percent rates. But now that rates are on the rise, potential homebuyers get excited, and want absolute certainty that the loan they have arranged to get will in fact be available on the day of closing. I believe that we have seen the last of the under 6 percent loan rates -- at least for the foreseeable future -- and thus the concept of "locking in" your mortgage interest rate becomes very important.

You are concerned that your lender will honor its commitment to you. This is understandable. Even if you can afford a higher rate loan, you now have a double problem: I strongly suspect that since property values have dramatically escalated in the past few years, you probably paid a high price for your house and a higher mortgage will mean a larger monthly payment..

Your lender has suggested that you "lock in" your rate. This is a good suggestion. This means that you have a binding, legal commitment from your mortgage lender that for a fixed period of time (usually 30 or 60 days from the time of application) you are going to obtain the rate that was initially promised by your lender.

The Federal Reserve Board has prepared a very helpful publication entitled, "A Consumers Guide to Mortgage Lock-ins ," which can be obtained from the Board of Governors of the Federal Reserve System, Washington, DC 20551. (This is available either at the link above, or by calling the Board's Publication Fulfillment staff at 202 452-3245).

The Federal Reserve defines a mortgage lock-in as follows:

A lock-in, also called a rate-lock or rate commitment, is a lender's promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed ...

A lock-in that is given when you apply for a loan may be useful because it's likely to take your lender several weeks or longer to prepare, document, and evaluate your loan application. During that time, the cost of mortgages may change. But if your interest rate and points are locked-in, you should be protected against increases while your application is processed ... . It is important to recognize that a lock-in is not the same as a loan commitment, although some loan commitments may contain a lock-in.

It is important that you get a written document spelling out the terms and conditions of your lock-in commitment. How long is the lock-in for? What rate have you locked in? Will an authorized representative of the loan company sign that document? Do you have to pay any money to get this lock? There have been lenders who have demanded a fee in order to get a rate lock, although some lenders will credit the money back when you go to settlement.

If the lender is unwilling to give you a written statement, you should consider looking for another lender. Even if a Judge will allow you to introduce the verbal commitment in any lawsuit you may file against the errant lender, litigation is time consuming, expensive and -- more importantly -- uncertain. You want to go to closing and move into your new home.

Although there is some disagreement among attorneys who represent the mortgage industry, it is my opinion that a lender who locks-in a rate and then is unable or unwilling to meet that deadline may be in breach of contract.

In order to have a legally binding contract, three elements are required: an offer, acceptance and consideration.

In your case, your lender has offered you a "locked-in rate." By signing the lock-in document, you have accepted that offer.

As for consideration, this often is in the form of money. You have probably paid something to your lender so that he can obtain a credit report and an appraisal of your property. But money is not the only aspect of "consideration." Since you have relied on this lender and have not made a loan application to any other mortgage company, this will also be considered "consideration;" the law defines this as "something of value."

It should be pointed out that the offer and the acceptance need not be in writing. While written documents are required for the sale of real estate, in this case we are not dealing with real estate -- but rather the financing of that real estate -- and oral representations are binding. The problem, of course, is proving that the statements were made. Thus, if you reduce everything to a written document, your proof problem will be much easier.

There is a Maryland Court of Appeals case which is often quoted by consumer attorneys. That Court issued an opinion stating:

The inducement of a guaranteed rate of interest ... especially in a time of fluctuating interest rates, clearly is intended to entice the customer to deal with the offering bank, rather than with some other lender.

Although the customer does not covenant that he will refrain from simultaneously making application with other lenders, we think the practicalities of the home loan market, and particularly the expense of each application, have the effect of at least temporarily taking the customer out of the market. As a greater number of loan applications may be expected to result in a greater number of loans, and thus, a greater profit, business advantage to the bank is real, even though every application will not lead to a profit.

Your lender has an obligation to process your loan expeditiously. I suggest that you keep in contact with your lender on a regular basis, to make sure that the loan process is moving forward.

What happens if you find out just a day or two before settlement that the locked-in rate will not be available? All too often, I have heard of cases where the lender will call and apologize that the locked in loan is not available, but you will be offered another loan immediately, albeit at a higher rate.

This is a business -- not a legal -- decision which only you can make. You obviously have to go to closing on your house. Otherwise, you may lose your earnest money deposit, or worse, be sued by your seller for damages.

My suggestion is this is to happen: contact the lender and advise him that if he does not honor his commitment, you will be filing complaints with your local Attorney General's office, the Federal Trade Commission, and you will retain counsel to file suit. Perhaps these threats will convince the lender to at least give you a better deal than was previously offered.

If you decide to accept a different (higher) rate from your lender, do not sign a release. The lender may insist that you sign such a document, whereby you release the lender from all liability in connection with the lock-in. To the extent that you can get away with not signing such a document, you will at least be able to keep all your options open -- after settlement.

Most lenders will honor their lock-in commitment. But to protect yourself, make sure that everything is in writing.

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Benny L Kass

Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of KASS LEGAL GROUP, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.

Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.


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