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You have the right to change mortgage issuers any time up to closing. Before switching late in the homebuying process, however, it's important to understand the potential pros and cons of doing so. Here's what you need to consider.
Can You Switch Mortgage Lenders?
Yes, you can switch mortgage lenders during closing. Under federal consumer protection laws, you have the right to change lenders for any reason, up until the close of a sale and your signing of a final loan agreement.
When Is It Too Late to Change Mortgage Lenders?
Once you sign a loan agreement (which occurs at closing), your mortgage is in force and enters what's known as its service term. From that point onward, the only way to switch lenders is to refinance—take out another mortgage and use the borrowed funds to pay off the original loan.
When to Consider Switching Mortgage Lenders
Here are some reasons you might consider switching mortgage lenders after you've been approved for a loan:
- Better loan terms become available. If interest rates are falling, more affordable loan offers may come to light between your preapproval with your current lender and the date of your closing.
- You're not happy with the customer service you've received. If your lender fails to respond quickly to your questions or follow-up requests, you find yourself getting shuffled among multiple contact persons or you just don't feel right about your relationship with your lender, it's OK to take your business elsewhere.
- Loan terms change between preapproval and approval. If you selected your lender based on interest rate and fees presented through its preapproval process, and the terms of their final offer were less favorable, you may wish to seek another lender, particularly if you have a preapproval from one or more that beats the final terms you were offered.
- Your lender declines final loan approval. If a home appraisal comes in low, meaning the house you want is worth less than the amount you want to borrow, the lender may decline the loan or reduce the amount it is willing to lend you. Unless you have a source of cash to make up the difference, you may have to seek another lender (and/or a different house).
Potential Disadvantages of Switching Mortgage Lenders
Switching mortgage lenders late in the homebuying process can have significant drawbacks, including the following:
Closing Delay (and Potential Cancellation or Fees)
If switching lenders means you'll miss a closing date you've set with the seller, the seller could cancel the sale (with notice) and keep your earnest money. The seller also might agree to an extension on the closing date, but may stipulate a per diem fee. This fee is typically a few hundred dollars for each day of delay, which you'll have to pay at closing, in addition to other agreed-upon fees.
Additional Appraisal Fee
Mortgage approval typically requires an appraisal by a professional chosen by the lender and paid for by you, the borrower. If you switch lenders, the new mortgage issuer is likely to require a new appraisal. Fees are typically a few hundred dollars but can run significantly higher if you're financing a home that's unusually large for its locale, or that has outbuildings or unusual amenities.
Potential Application Fee
Some mortgage lenders charge upfront fees of up to $500 for processing your mortgage application. This is not a universal practice, so you may be able to stick to lenders that don't charge these fees. Also, try financial institutions with which you have a relationship; lenders that customarily charge application fees may waive them for established customers.
Potential Credit Score Impact
If you decide to switch lenders two weeks or longer after you obtained approval from your current lender, there's a chance the credit check required for the new loan will cause a small reduction in your credit score. Mortgage preapproval and approval applications typically trigger a request to view your credit report and credit score, known as a hard inquiry. A hard inquiry recorded on your credit report can cause your credit scores to drop by a few points.
Credit scoring systems encourage rate shopping by treating hard inquiries related to mortgage applications as a single event if they're made within a short timeframe, but how short that timeframe is depends on the scoring system that's used: The VantageScore® system does so with any series of applications as long as the time gap between any pair is two weeks or less. Newer versions of the FICO® Score☉ allow 45 days between applications, but older versions allow gaps of no more than two weeks. (Unfortunately, there's no way of knowing which scoring system a given lender will use.)
Learn more >> Everything You Need to Know About Mortgage Fees
How to Change Your Mortgage Lender
Here's how to go about switching mortgage lenders after you've made an offer on a house:
- Seek mortgage preapproval from other lenders. No matter what your reason may be for wanting a new lender, you should aim for the best deal you can get, in terms of interest rates and fees as encapsulated in the annual percentage rate (APR) for your loan. Preapproval is a relatively quick process, but lenders may take anywhere from minutes to days to issue a preapproval letter.
If interest rates have dropped or your credit scores have increased since you last sought preapproval, you may find some better options available to you. If you can't get terms as good as the ones on your current loan, you may want to think again about changing lenders.
- Communicate with your agent and the seller. Once you are certain you'll be seeking a new lender, let your agent know and have them relay the information to the seller, with a clear explanation of your reasons and plans going forward. Consult with your agent about options to propose if the seller wants to cancel the sale or to buy you more time by rescheduling the closing. For instance, offering to rent the house on a short-term basis until the new loan is approved might ease the time crunch.
- Submit a full application to the lender of your choice. Contact them to let them know your situation and the importance of managing the process as quickly as possible. Ask if there's anything you can do to speed up the process, including obtaining a new appraisal, if necessary.
- Finalize the sale. Once you've received approval, schedule a new closing date (as early as possible is usually best), and complete the sale.
The Bottom Line
It's your right to switch mortgage lenders after you've made an offer on a home, but doing so can be risky and stressful so make sure you fully understand the process before moving ahead. To get an idea how favorably lenders are likely to view your mortgage application, you can check your FICO® Score free from Experian.