Getting a mortgage loan is a process. As part of the process, you’re required to provide the lender with a bunch of information and documentation. The lender pulls and reviews your credit, orders an appraisal and a title commitment, and compiles a complete loan file. The entire process typically takes four to eight weeks depending on a variety of factors.
So what happens if mortgage interest rates change from when you start your loan to when you complete it? Some lenders offer a rate lock, which guarantees your interest rate for a specified time period, usually from initial approval through closing. Let’s take a look at what this looks like for consumer and investor purpose loans and at what investors can expect.
Consumer Mortgage Rate Locks
In the consumer or owner-occupied mortgage market (we’ll refer to them as consumer mortgage lenders), you typically can lock your interest rate for 30-60 days when you start your loan. The lender usually builds the cost of locking the interest rate into the interest rate they quote you. In other words, without the rate lock, your interest rate likely would be slightly lower.
Why is there a cost associated with the consumer mortgage lender locking your interest rate? Consumer mortgage lenders adjust their interest rates frequently (daily or even intra-daily) as underlying benchmark interest rates and credit spreads move in the U.S. bond market. Their profitability depends heavily on how well they adjust their rates and importantly how well they hedge the risk associated with closing a mortgage loan 30 to 60 days in the future using today’s interest rates. We’re not going to go into the mechanics of this process but suffice to say that a consumer mortgage lender incurs expenses associated with locking your interest rate 30-60 days before they complete and fund your loan.
Business Purpose Loans & Rate Locks
So how does this work in Visio’s segment of the mortgage market? Visio provides business purpose loans for single-family rental properties, including long-term rentals and vacation rentals, and small balance commercial properties. Rate locks, at least rate locks of more than a couple weeks, are uncommon for business purpose loans. This is for at least two reasons. First, given the specialized nature of business purpose loans, such as Visio’s Rental360, interest rates tend to be less volatile. Business purpose lenders tend to adjust interest rates intermittently except during periods of dramatic change in the U.S. bond markets. Second, while many business purpose lenders, such as Visio, originate many hundreds of millions of dollars in mortgage loans each year, they typically are not large enough to engage in effective interest rate hedging to offer longer interest rate locks.
How Investors Can Protect Themselves from Rate Changes
What can you do to protect yourself from an unexpected interest rate change while you’re in the process of obtaining a business purpose loan? Speed is your friend. Not everything is in your control, but you can impact how quickly a lender completes your loan. Here are some tips:
1. Make your loan a personal priority. If you’re asked to provide information or a document, provide it the same day. Don’t try to complete a loan in the midst of a big vacation or constant traveling.
2.Make yourself available. The appraiser will need access to the property you’re financing. If you have a tenant in it, contact them before starting the loan process to make sure they will cooperate with giving the appraiser access. When the appraiser calls you to schedule the appraisal, be responsive.
3.Title issues can wreak havoc on a loan. Before starting the loan, think hard about whether there might be any title issues for your property? If you refinanced it before, did you get a release of lien for your prior loan? Might there be a mechanic’s lien on your property from a dispute you had with a contractor? Are you current on your property taxes?
4. Insurance often is the long-pole in the tent. Insuring a rental property is not the same thing as insuring your personal residence. To learn more, see our Landlord Insurance Guide. You will save yourself a lot of time and speed up your loan if you engage your insurance broker before starting your loan.
5. Liquid reserves. Most lenders require proof of some amount of liquid reserves. On a purchase loan, you’ll likely need to prove you have the cash for the down payment and some number of months of loan payments. Don’t start a loan with the hope that you’ll have the reserves before close.
Speed is your best defense against an unexpected interest rate increase in the midst of your loan process. Yes, you cannot control how quickly the appraiser completes the appraisal or how quickly the title company completes their work, but you can have a big impact on how quickly a lender completes your loan.
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