Can You Switch Mortgage Lenders Before Closing?

Although it's possible to switch lenders, and in some cases necessary, there are potential risks to consider.

Can You Switch Mortgage Lenders?

It may be worth it to get out of a bad situation. (Getty Images)

If you're having a bad experience with a mortgage lender, you may be tempted to switch to a different one before you close on the loan. While it's possible to switch, it's important to keep the potential consequences in mind, including higher costs, delayed closing and another credit check.

Depending on the situation, though, getting out of a bad experience can be worth it, and the drawbacks may be manageable. If you're thinking about switching mortgage lenders before closing, here's what you need to know.

Can You Switch Mortgage Companies?

As the borrower, you have the right to switch mortgage lenders at any time before you sign the loan contract. Still, it's best to do your due diligence upfront, before you begin the closing process.

"Homebuyers should arm themselves with as much information as they can," says Robert Heck, vice president of mortgage at digital mortgage marketplace Morty. "You can also save yourself unnecessary stress and money by doing the groundwork upfront and shopping around for different lenders and rates ahead of closing."

Despite your research, you still might find yourself stuck with a lender you no longer want to work with. There are many reasons to consider a change to a different mortgage lender, including:

  • Delays to the closing date, which can impact both you and the seller.
  • Poor customer service, unresponsiveness or disorganization.
  • Unexpected changes to loan fees, terms or conditions.
  • Constant changes to whom you're working with.
  • A lower interest rate or lower closing costs with a different lender.
  • Requirements that exceed the standard qualification guidelines for the loan program, called an overlay.

In some cases, a buyer may need to switch lenders out of necessity, says Ray Rodriguez, regional mortgage sales manager for New York at TD Bank.
"If you find out during the process that you do not qualify for the product that you applied for or the property does not meet the lender's guidelines," he says, "a buyer may not have any choice but to apply elsewhere."

What to Consider Before You Switch to a Different Lender

While there are many good reasons to consider a switch, there are also some potential downsides that may make you think twice about your decision. In some cases, these drawbacks can be worth it, but in others, you may be better off staying with your current lender.

Closing Delays

It can take between 30 and 45 days on average to close on a mortgage, and if you switch to a different lender, you'll need to start the whole process over. If the seller wants to close before then, it could impact your deal.

You may even need to pay a daily fee to the seller to make up for the delay, and, in extreme cases, it could cause the sale to fall through. In this case, the seller could keep your earnest money because you were the one in breach of the contract.

In some cases, lenders can offer faster-than-average closing times. Before you make the switch, contact the lender and ask whether it can meet your deadline for closing.

New Credit Check

You'll need to submit a new application and undergo another credit check from the new lender.

If you're still early in the process, an additional hard inquiry may not impact your credit score – FICO combines inquiries from mortgage lenders into one for scoring purposes if they occurred during a 14-day span for older scoring models and a 45-day span for newer ones.

Also, if your credit score has decreased since you applied for your current loan, that could impact your approval odds – though it can also affect your ability to close with your current lender.

Potentially Higher Interest Rate

If you're switching because interest rates have dropped, you don't have to worry about this. But in other scenarios, if you've locked in a rate with your current lender, the new lender isn't bound by that agreement, which could result in a higher interest rate.

Before you switch to a new lender because it's offering a lower rate, check with your current lender to see if it's willing to match the rate or if it has a float-down option to lower your locked-in rate.

Repeated Costs

Depending on how far you've gotten in the mortgage process, you may need to repeat some of the costs that you've already paid.

In most cases, for instance, appraisals aren't portable from one lender to another – unless you're applying for a Federal Housing Administration loan, which allows portability. "If a new appraisal is needed, there is a risk that the value of the home could come back lower than the original appraisal," says Rodriguez, "which could negatively impact pricing, product and other factors."

Additionally, you'll likely also need to pay new credit report fees when the lender runs a credit check. Consider how these repeated fees can affect your budget and cash reserves.

Also, keep in mind that the new lender could charge higher closing costs than your current one. Be sure to request a loan estimate with information about the interest rate and costs before you make your decision.

Added Stress

The homebuying process can be a stressful experience, says Rodriguez, so it's important to take the emotional impact of prolonging it into consideration. "Switching lenders can add to a buyer's stress level," he adds, "so you must decide if it's worth it to do so."

How to Change Mortgage Companies

The process for switching to a different mortgage lender is no different from what you needed to do when you applied with your current one.

If you already have a lender in mind, you'll submit an application and provide all of the necessary documentation all over again. It's important to note, however, that if you're switching because another lender is offering a lower interest rate, that rate could change based on a credit check and an appraisal.

If you don't have another lender in mind already, you'll need to shop around and get preapproved with multiple lenders so you can compare their offers. This process can take several days, so it's important to get started right away, especially if you're under contract on a home and have a deadline.

"As online platforms continue to reinvent real estate transactions, there are many ways to compare mortgage options so you can make sure you’re getting the most competitive deal," says Heck.

Once you find the right lender, you'll lock in a rate and proceed with the underwriting process. If you can't find a lender that can offer a good enough deal to make the switch worth it, you may stick with your current lender after all. If you don't like your current lender, you might have the chance to refinance the loan later on.

Make sure you keep your real estate agent and the seller informed about your decision to change mortgage lenders, as they may need to establish a new timeline for closing. Consult with your agent before you make the decision to change lenders to get your agent's advice on how it might impact you.

Tags: mortgages

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