The Interest Rates on Your FHA Home Loan
November 5, 2013
Mortgage rates have been through a variety of changes over the course of 2013. The current range of rates at the time of this writing is lower than in weeks past for a variety of reasons, but many borrowers are still in the dark about what happens when they commit to an interest rate. How do interest rate locks on FHA mortgages work?
The FHA loan rulebook, HUD 4155.1, has the answers. Borrowers should know the FHA has nothing to do with setting the rates, that is a matter for the borrower and lender to work out together. “Under all currently active FHA single family mortgage insurance programs, the borrower and the lender negotiate the interest rate and any discount points” according to HUD 4155.1
It’s obvious that committing to a specific interest rate on a day when rates are particularly low is a good idea--but the loan won’t close until a later date in many cases, so how do the borrower and lender settle on the interest rate?
That’s where an interest rate lock-in, which has the lender and borrower committing to a specific interest rate in writing, comes into play. According to the FHA, “The minimum time for lock-ins or rate locks is 15 days. The loan may close in less than 15 days at the convenience of the borrower, and the lender may still earn the lock-in fees. Lenders must honor all such commitments.”
What’s helpful to know about these agreements? When negotiating an interest rate lock-in, “Lenders are permitted to charge a commitment fee to guarantee, in writing, the interest rate and any discount points for a specific period of time, or to limit the extent to which the interest rate or discount points may change.”
It’s important to make sure you can close the deal and complete paperwork and other requirements without letting your interest rate lock-in period expire. Mortgage loan rates can and do change--they could be higher or lower after the agreed-upon lock-in rate period expires.
Borrower should also know that any changes to the written agreement for the lock-in rate may require additional paperwork as well as certification from both the lender and the borrower that the changes are agreed-upon--that is required by FHA loan rules and is not optional. Discuss specific interest rate lock-in policies with your loan officer, as each financial institution may have different procedures and processes for the lock-in agreement.
The FHA loan rulebook, HUD 4155.1, has the answers. Borrowers should know the FHA has nothing to do with setting the rates, that is a matter for the borrower and lender to work out together. “Under all currently active FHA single family mortgage insurance programs, the borrower and the lender negotiate the interest rate and any discount points” according to HUD 4155.1
It’s obvious that committing to a specific interest rate on a day when rates are particularly low is a good idea--but the loan won’t close until a later date in many cases, so how do the borrower and lender settle on the interest rate?
That’s where an interest rate lock-in, which has the lender and borrower committing to a specific interest rate in writing, comes into play. According to the FHA, “The minimum time for lock-ins or rate locks is 15 days. The loan may close in less than 15 days at the convenience of the borrower, and the lender may still earn the lock-in fees. Lenders must honor all such commitments.”
What’s helpful to know about these agreements? When negotiating an interest rate lock-in, “Lenders are permitted to charge a commitment fee to guarantee, in writing, the interest rate and any discount points for a specific period of time, or to limit the extent to which the interest rate or discount points may change.”
It’s important to make sure you can close the deal and complete paperwork and other requirements without letting your interest rate lock-in period expire. Mortgage loan rates can and do change--they could be higher or lower after the agreed-upon lock-in rate period expires.
Borrower should also know that any changes to the written agreement for the lock-in rate may require additional paperwork as well as certification from both the lender and the borrower that the changes are agreed-upon--that is required by FHA loan rules and is not optional. Discuss specific interest rate lock-in policies with your loan officer, as each financial institution may have different procedures and processes for the lock-in agreement.
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