FHA Mortgage 101: Locking Your FHA Loan Rate
By: Rosemary Rugnetta
August 24th 2010 (FreeRateUpdate.com) – Even though FHA mortgages have become quite popular during the past several years, understanding what they are all about is still somewhat of a mystery to many people. Loan rates can, and often do, change several times per day. Each time they change, the loan officer and staff are notified of the changes. Sometimes they are notified in advance of changes so that they may lock any loans that may be floating for the best rate. Although the process of obtaining an FHA loan may seem a bit excessive for some individuals, locking your FHA loan is quite simple but, nevertheless, should be taken seriously.
A rate lock is a lender’s promise to honor a certain interest rate for a specified period of time while the loan application is being processed and goes through underwriting. Since the final mortgage terms, cost and monthly payment depend on the interest rate, an FHA loan, or any loan, cannot be underwritten without a locked interest rate. This prevents the lender from having to redo the entire process in the event that interest rates increase.
Locking your FHA loan is similar to locking any conventional loan. FHA does not set the interest rate for loans. This is done by the lender. Rate lock rules also vary from lender to lender. Some have a free lock period with 30 and 45 day lock rates being free of charge. They may also have a float down provision which gives the borrower the lower rate if rates fall within a given window of time. Some will extend the locked rate past expiration for a few days at no additional cost. Any particular rules which a lender offers should always be in the form of a written contract.
When locking your FHA loan, the lender is holding that particular rate frozen for a period of time so that no matter what happens, the locked rate is honored. The lender is under no obligations to lower the rate after it is locked if rates go down. Rate lock periods can vary in length from 15 days to over 90 days. The longer the period of the rate lock, the higher the interest rate and cost of points. When the FHA loan rate is locked, the individual’s credit score and debt to income ratios are also taken into account to determine the rate. Until your FHA loan rate is locked, the rate on the Good Faith Estimate is just that, an estimate which reflects the current rates. It is not a guarantee of interest rate.
There are a few things to consider when locking your FHA loan. If the loan is a refinance, it’s important to let your loan officer know your target rate and monthly payment. Although you can wait to reach your target rate, remember that any documentation that is submitted to the lender may have to be updated if you wait too long to lock the rate. Also remember to have enough days prior to the rate lock expiration to accommodate the three day right of rescission rule when refinancing. When purchasing a home, the interest rate will float until there is a purchase contract. In either case, the length of the rate lock should be based on how many days are needed to complete the transaction.
Locking your FHA loan requires a written contract between the borrower and the lender. The document will have the property address, borrower’s name, social security number, program type, purchase or refinance price, loan amount and credit scores. It will also have the length of time, interest rate and any points associated with the rate lock. It is also a good time to receive an updated Good Faith Estimate when an FHA loan has been locked. Once the rate has been locked, the clock then begins to count down to the closing date.
Considering that FHA loan demand is extremely high and staff to accommodate the demand is low, it is probably a good idea to make sure that there is enough time allowed to complete the loan process when locking the interest rate. Locking your FHA loan rate for 30 or 45 days is probably the normal amount of time. It is always better to have a few extra days than to come up short only to be faced with a lock expiration that can end up costing you more money.