Your Pre-Approval Rate Is NOT Your Interest Rate (Need to ID a Property)

We like to periodically remind homebuyers to reach out to their lender to check their mortgage pre-approval before making offers, as interest rates are changing rapidly in today’s hot market. Many homebuyers are caught off guard during their homebuying journey when they realize that the interest rate lenders quote during the pre-approval process is not the interest rate they will get when they go into contract.

The only exception would be when rates do not move at all between the pre-approval date and the date a buyer enters into contract – but that is very rare.

Because interest rates have risen considerably, they may be sparking some concerns. If you’re thinking about putting in an offer soon, contact our team to discuss how the increase in rates may impact your pre-approval. 

This reminder is particularly important now because rates have been rising so quickly.

Most lenders quote “market rates” based on the prevailing rate environment during the pre-approval process.

Some lenders unfortunately though quote below-market rates (that don’t exist) during the pre-approval process, as a way to keep borrowers attached, but then invariably announce that rates have increased when borrowers go into contract. We of course would never play that game, but it is something all borrowers should be leery of.

We had a borrower come to us a few weeks ago to take advantage of our fast close (14 days) after getting pre-approved at another lender a few weeks earlier – when rates were almost 1/2% lower. Because he did not understand that the other lender was not going to honor the “estimated rate” quoted at pre-approval and because he was not aware of how much rates had risen, he insisted that we were trying to take advantage of him.

What made his accusations particularly ironic was the fact that we “survey” the other lender’s rates every week, and we know our rates are lower.

But – his concerns prompted this blog – so it all worked out.

I should add too that we send out periodic rate updates to ALL of our pre-approved borrowers to ensure there are no surprises when they go into contract.

Why Lenders Don’t Lock In Rates At The Pre-Approval Stage

  1. Must ID a Property – To Accompany the Rate Lock: Most lenders require borrowers to identify a property address before they will lock in a rate on behalf of the borrower. If a transaction falls through for any reason and the borrower has to find another property, she will have to re-lock her rate at whatever the current market bears.
  2. Locks Must Be for a Specific/Short Time Period: Rate locks have to be for a specific period of time, e.g. 7 days, 15 days, 30 days, 45 days or 60 days; the longer the lock period, the more expensive it is. And because lenders and borrowers alike have no idea how long it will take a borrower to find a home once she is pre-approved, it would be impossible to identify the proper lock period even if an address was NOT required. In addition, it sometimes takes borrowers as long as six months or more to find a home, exceeding all available lock periods in any case.
  3. Can Lock At Pre-Approval Stage – for a Fat Fee: We do have a program, however, that allows borrowers to lock in a rate for as much as one year without identifying a property. BUT – this program requires a substantial upfront fee – and a higher rate if locking for more than 180 days. The fees vary anywhere from 3/8 of a point to 1.5 points, depending on the length of the lock, but not all of the fees have to be paid upfront. The program is awesome when rates are rising like they have been recently, and OK if rates fall because it allows for a one-time rolldown to “market” within 30 days of close of escrow. BUT – in relatively steady rate environments, this program can prove to be a complete waste of money – which can frustrate borrowers.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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