Should Pre-Approval Letter Contain Interest Rate?

Question

Hi BP Community,

I'm a first-time home buyer in New York City. I was wondering whether a pre-approval letter from a bank should always contain the pre-approved amount plus the interest rate for the duration of the term?

My lender told me that I cannot lock a rate until you are in contract to purchase. Is this accurate?

Thanks!

Regards,

Nick

Matt Devincenzo · Answer

I think you're focused on the wrong object here. You keep saying when do I shop for a rate? You already did that, and seemingly now have a good idea of what type of loan you'd qualify for, the terms you could get, and an expectation of a rate on that loan. Based on this pick your lender (or loan Broker) now, or keep shopping for one that you feel more comfortable with. Once you get in contract use that person for your purchase...if you find a loan that might save you 0.15% on your loan (my opinion) don't worry about it and stick with your lender. You should be choosing your lender or broker based on the service they provide, and their knowledge to help close your loan.

I've used @Chris Mason as my loan broker a few times now here in CA. I'm almost positive I could get him to shop a loan for me, then go out and find some online lender for 0.25% less...and then deal with them for 4-6 months back and forth asking for the same document 15 times, having it expire and provide it again, lose my rate lock and getting a different rate etc. I use Chris because he makes sure he's using a lender that meets my objectives for a closing date etc. He gives years of experienced discussion on why market conditions indicate I may save a bit if we float the rate until closer to closing, he tells me we'll request an appraisal waiver because my LTV is good and I don't need to spend $750 to rush an appraisal that still will take 6 weeks...that's why you choose a lender/broker because of their service.

Food for thought on a $1,000,000 loan a 0.25% increase takes your payment from $4,216 to $4,352, that is $136/mo on a million dollar loan! Don't step over dollars to pick up dimes. I like an extra $136/mo just as much as the next guy, but I'd rather get a fast closing on a decent deal and not stress the closing because my discount lender can't meet the deadline.

Chris Mason · Answer

Thanks, @Matt Devincenzo!

And I'll note that the one time you DID say to me "I don't care how slow it closes, I want that extra 0.25!" you did get what you wanted -- you got that 0.25%ish, and it did take like 3 or 4 months to close b/c we picked a lender with all stat points dumped into rate, nothing left for speed. :P

Reminder to the group. Everyone gets the same 20 stat points to allocate across the 3 categories of fast, cheap, reliable, which each go from 1 to 10. If you dump all 10 into 2 categories, then you used up all 20, and there's nothing left for the 3rd. Like the old computer hardware saying "fast, cheap, reliable... pick 2." Or the real estate saying, "location, price, house itself, pick 2. The best house at the best location isn't going to be cheap, and the cheapest physical house that checks all your boxes probably isn't going to be in the best location." I'll let someone else do the "significant other" version of this. :)

Local independent mortgage broker gets to be a chameleon by virtue of working with multiple lenders, rather than being employed by just one. Speed demon Monday, rate whore Tuesday, and so on.

Jared Rine · Answer

@Nick Louie..based on your last response.  All 3 of those lenders should be able to give you a rate though, even if it's verbal, not just the range, so you know pretty much where you stand. Unless they're all the same, at one lender 3.25% might be giving you lender credit where the same rate with Lender 2 might be a cost.  It's definitely worth discussing with your Loan officer.

Jared Rine · Answer

@Nick Louie..no lender I know of does this in CA.  When I'm doing this for my client's, we talk about a rate range, but pre-approvals are never issued with a hard interest rate and definitely never locked (I can't lock your rate if you're not registered and submitted).  Your mortgage broker or banker should be able to give you some type of range so that you're not making offers blind.  If they aren't doing that, find a different lender.

Jared Rine · Answer

@Nick Louie..your broker or lender should be able to give you a pretty good pinpoint if you've gone through the pre-approval process (take loan app, run credit, get income docs, etc. - that's how I do a full pre-approval).  I go over with my clients where they'd likely be (loan terms, rate, etc.), assuming we're moving forward, and we talk over expectations, based on market.  Then they go shopping, knowing where they are, but not completely set in stone.  If your lender isn't at least doing then, then in my professional opinion, you probably should get another lender and/or a 2nd opinion.  That's my $0.02.

David Kelly · Answer

A rate isnt locked until a purchase agreement has been produced.  Even then, you can still float the rate up until closer to closing.  Rates are based off of LTV's and DTI and if we don't know what numbers we are working with then we cannot lock accordingly.

Rates are not usually part of the pre-approval letter because, again, we dont know what property you are looking at buying and they all vary based off of taxes, insurance, etc...  However, if you are close to not qualifying based off of a higher rate, I would always be sure to tell the Agent and borrower that if rates increase that the loan may not be good anymore.

Nick Louie · Answer

Hi Matt,

Thanks for your tips here. Oddly enough, I talked to three lenders who have pre-approved me, but they all couldn't pinpoint an interest rate. Instead, they gave a broad range: high 2s to low 3s. So, I need to decide without having the full picture. Since I'm a first-time home buyer, I was under the impression the pre-approval letter should contain an interest rate. But after starting this thread, I now know that depending on the market, the lenders give the interest rate once I enter into contract.

You made some good points on other qualities one should focus on when choosing a lender, but again, I'm not experienced here. I'm in the very beginning of my journey, and I'm still building my team. I want to make sure it's the right team. I agree with you that there are other reasons to pick a lender besides interest rates, but that doesn't mean one should disregard it. I'm just saying I'd like to know what the market is offering before making a decision.

Nick Louie · Answer

@Jared Rine

Thanks for sharing your thoughts. I agree with you. I talked to a couple lenders and they all gave me a pretty wide range. I wish you were in NYC!

So, I’m wondering, when would be the best time to shop around for mortgages based on the interest rate? I assume it would be once I enter into contract with a seller?

Nick Louie · Answer

Thanks for taking the time to reply. So when would be a good time to shop around for lenders? After I enter into a contract with the seller? Then at that point, I can go back to the lenders, discuss specific rates, and determine which lender is offering the best terms?

Nick Louie · Answer

@Jared Rine, Thanks for this. This makes sense. So, the correct time to shop around for mortgages would be after I enter into contract right. My lender did give me a range of high 2s to low 3s...Seems like a wide range.

Should Pre-Approval Letter Contain Interest Rate?

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