Rate lock is commitment by the lender to provide (as long as lock period does not expire and as long as loan parameters do not change) and by the borrower to accept the agreed upon terms, regardless of what happens to the rates market.
Assuming this is a standard loan which the lender anticipates selling to Fannie Mae, Freddie Mac or another secondary market investor, in simplified terms, the lender either hedges the loan (purchases financial instrument in the right amount which goes up in value if rates rise prior to sale) or obtains a take-out lock commitment from secondary market investor in exchange for commitment to sell the loan to the investor, which in turn does the hedging.
Lender loses money on wasted cost of hedging. If the lender obtained a take-out lock commitment, lender’s investor demans to pair off their costs, makes working with investor more expensive and eventually stops working with the lender. Locked loan fallouts above minimum percentage result in having to raise profit margins on loans which do close, which means offering higher rates to all consumers. Lenders who wish to be competitive therefore implement reasonable measures to limit instances of locked loans not closing.
Borrower’s purchase transaction not reaching Purchase and Sale agreement, borrowers changing their mind about the loan, and not being able to approve the borrower are the most common causes.
We will accept a request to lock the mutually agreed upon terms after the borrower reviews initial Loan Estimate and signs Intent to Proceed, provided that a) on purchase transactions the buyer is under Purchase and Sale contract or at least past inspection and is proceeding with the purchase, b) loan application does not reveal factors which can potentially cause the loan to be denied in which case we will attempt to address the issues first, and c) borrower provides payment for appraisal which is always needed at the onset of the transaction.