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Vital part of the home search process
When do you lock your mortgage rate?
Locking your interest rate protects you from increases due to market conditions. Locking early safeguards your budgeted payment. By locking the rate, if the market goes up, you get the lower rate; if it goes down after the lock, you may be able to pay a fee and lower the rate.
Knowing when to take the lock is determined by which direction you think the market is going. If you think rates are going up, lock in early. If you think rates are going down, ride the rate to within a few days of closing.
Some lenders may allow a borrower to lock a rate after pre-approval but is more common to not offer a lock until there is a signed contract on a home. Even with a pre-approval, it could easily take 30 days or more to close a transaction and the rates can move a lot in that period.
There may be a fee charged to lock a rate which is determined by the lender. Generally, the longer the time for the rate lock, the higher the fee.
There is a lock period established by the lender that guarantees the rate, if the loan is closed by the expiration date. Normal lock periods can be between 30 to 60 days. Longer periods may be available but will probably require higher fees.
Things that could affect your rate lock are:
- The appraised value comes in lower than what was expected in the sales contract.
- The borrowers’ credit changes considerably before the closing.
- The loan amount changes after the rate lock.
- The loan type changes.
- The down payment decreases before the closing.
- Some income, like bonuses or overtime, could not be verified.
If a higher rate at closing means that you will no longer be able to qualify for the mortgage, it may be more important to lock in early. Looking at what the rates have done for the preceding weeks may indicate a trend but at the same time, markets have turned overnight and started moving in the opposite direction.
A trusted mortgage professional can give you good advice and why they feel you should either lock the rate or let it ride. Your real estate agent can help also but ultimately, the decision is yours.
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Rethinking Backup Offers
Like with any professional, there are tools and techniques available to help with particular situations. They might be more popular at certain times and might even be put aside or forgotten at others. For real estate professionals, one of those is the backup offer.
In a situation where there are multiple offers, the seller can accept any offer for whatever reasons are important to them, leaving the makers of the other offers disappointed. There is always some uncertainty that the buyers on a contract will close accordingly. To hedge on that possibility, the seller may choose to make a counteroffer to one or more of the other offers to be a backup should the primary contract not close.
From a buyer’s perspective, the purpose of a backup offer is to be next in line to have the chance to purchase the property should the first contract fall through. The benefit is that you’ll be next in line to purchase the home without having to submit another offer and possibly, get into a bidding war. It simply moves from the first backup to the primary contract position.
The buyer in the backup position also experiences uncertainty if it will work and possibly, feeling like they could be wasting their time while waiting to hear the outcome of the first contract. Some of these buyers will continue to look at homes in the likelihood that another acceptable or better property becomes available.
Should this situation occur, the buyer in the backup position may or may not have the ability to withdraw from their contract. It will depend on how the agreement is written. It is important to understand the rights and limitations, as well as when they can be exercised.
A backup offer can lock you into a binding contract until the primary contract’s buyer is approved and closed or until it fails to close and the backup buyer becomes the primary. The backup may or may not have a unilateral way to withdraw the offer prior to one of these outcomes.
Considerations that need to be understood by sellers and buyers alike are:
- Can a buyer in a backup contract unilaterally withdraw at any time?
- Will the earnest money be deposited on a backup offer?
- Will the timelines for contingencies like mortgage or inspections need to be made before becoming the primary contract?
- Will there be any fees incurred by the backup buyer?
Sellers sometimes use a backup offer to apply leverage to the primary contract’s buyer. For instance, if the seller feels the buyers’ demands on repairs are too high, the seller might say something like “if you’re not willing to accept it ‘as is’, I have another buyer waiting to do so.”
Many buyers, as well as their agents, don’t want to obligate themselves to a back-up offer. However, in certain situations, it is a good tool to have the opportunity to purchase a home that meets their needs.
In the highly competitive market experienced in 2021 and part of 2022, some buyers may have been reluctant to use a backup because of the slim possibility that it would become the primary. With the shift in the market due to the interest rate increases, a backup offer could be a viable tool to get the home of your dreams.
Your real estate professional can help you understand the advantages and disadvantages of backup offers. Recognizing that contracts are legal and binding agreements, you can also consult an attorney who can confer with your agent to understand the situation.
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