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.