When you lock a rate on a purchase or refinance loan, you most likely only locked the rate for 30 days or less. That should be more than enough time to process and close the loan, assuming there are no unusual issues and everyone is cooperating. Once that loan is closed and funded, the lender has their pay day, a saleable loan.
But that is not the case with a 1x close Conventional Construction to Permanent loan. These loans are not saleable, and the lender doesn’t have their payday, until the C of O issued, the final inspection is done by the appraiser and you, the borrower, sign the Modification Agreement. This modifies the loan from an interest only payment construction loan to your 30-year, fixed rate mortgage.
So when the lender does offer you a rate lock on these loans, they need to lock the rate not for 30 days but a full year. No lender can offer you a year long rate lock at the same rate as a 30 day lock. So the rate you lock into in the beginning of the process is actually a rate “cap”. Your end loan will not be any higher than the rate cap so long as you complete all the steps mentioned above within 12 months, but it could be lower!
When the lender prepares the Modification Agreement, they can not only change the type of loan you have, they can lower the rate. When this time comes most lenders will look at what kind of rate you would qualify for at that time if you were requesting a purchase or refi loan. If that rate is lower, you get the lower rate!
This is done for two reasons. First, the lender does not want you to refinance the loan. They just went through a lot of work and risk to have a mortgage with you. If they try to hold you to a significantly higher rate than you could refi to, you are just going to refi and all their work is wasted now. The second reason they do this is because the lower rate mortgage might be worth more than a higher rate one. I know this sounds counter intuitive, it has to do with the likelihood of a higher rate being refinanced vs a loan at market rate.
If you have questions feel free to call me at 586-917-5534, email me at jerrythomas1958@gmail.com or visit my website at bestfhaconstructionloan.com.
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