Why Is The Interest Rate On My Purchase Agreement Different Than What My Lender Said?

by John Glynn on March 15, 2011

This is a question we hear all the time.

The sequence of events leading up to buying a home includes the following:

  • pre-approval & custom rate quote
  • present offer to buy a property
  • acceptance of offer & eventual rate lock

The first and last of these steps are handled by the lender, and the second one by the real estate agent.  A buyer will often get mixed signals  from these first two steps, because both include a snapshot of the mortgage rate prior to the point where it gets locked in.

But there is a key difference between the two snapshots. The rate indicated in the contract is deliberately high. In most contracts/purchase agreements, there is a section indicating a ceiling rate at which the buyer will obtain financing for their loan. And if the best market rate they can get is above this rate, it means the buyer has the option to cancel the contract. There’s always a chance that a buyer could make an offer, and by the time it gets accepted, see rates run up beyond a level that they can afford, so using this maximum rate as a ceiling limits the buyer’s exposure to the interest rate market.

Reading between the lines, sellers might look at a lower ceiling rate as a higher risk. In other words, “this buyer is only willing to buy if they can finance at X.XXX% or less”. From that perspective, the higher the rate, the safer the seller, and the stronger your offer. The real estate agent knows to pad the actual market rate by a little just so they do not portray the buyer as skittish.

The cost of financing is as significant as the cost of the house in the long run. So having a ceiling rate here is a safety valve to protect the buyer.

The rate indicated in the contract is not a mortgage quote. A rate that is above the current market rate tells the seller you are eager to buy their home. A rate at or below tells them you want to have an easy out. You’ll want to find the right balance when presenting an offer that is appealing to the seller, and safe for the buyer.

When it comes to getting at the actual interest rate for your loan, work with your lender to devise a locking strategy. And keep in mind, rates are changing frequently.

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