October 23, 2014
We write weekly, sometimes more frequently, about the state of FHA loan interest rates. We discuss trends, terminology, and the possible future of those rates. But some potential FHA borrowers are confused by terms like “locking” and “floating”. What does it mean to get an interest rate lock on an FHA mortgage loan?
Let’s start by examining the basic rules of negotiating FHA rates on the loan. According to the FHA loan rulebook, HUD 4155.1, the lender and borrower are expected to come to an agreement on interest rates on the loan–the FHA does not set the rates.
“Under all currently active FHA single family mortgage insurance programs, the borrower and the lender negotiate the interest rate and any discount points.”
That’s found in the opening chapter of HUD 4155.1. When the interest rate is negotiated, it is subject to change until the lender and borrower have entered into an agreement to “protect” the agreed-upon rate for a specific time frame. This is called the “lock” and is what is referred to when we discuss whether a borrower should “lock” the rate agreed upon with the lender, or “float” and renegotiate the rate on another day when it might be lower.
The lender may charge a fee to lock in the interest rate, which is a practice permitted by FHA loan rules. From HUD 4155.1:
“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.”
How long can the lock last? It’s certainly not an indefinite lock as that would provide a severe disadvantage to the lender should the borrower hold off on committing to the loan for a long period of time.
But there must be a minimum time that the lock can be honored for in order to help protect the borrower’s interests, too. FHA loan rules state:
“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.”
Do you have questions about FHA home loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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