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Getting a mortgage should start before you even begin looking at property to buy. But what if you end up not wanting to stay with the lender you originally chose, can you switch mortgage lenders before closing?
First, homebuyers should get a preapproval letter from a lender, which involves submitting a mortgage preapproval letter along with the necessary accompanying documents. The process can take time, but it gives buyers the confidence to make offers knowing they are already knee-deep in the mortgage process.
- What is a mortgage lender?
- Is changing mortgage lender before closing allowed?
- When might you consider changing mortgage lenders?
- Does locking a rate commit you to a lender?
- What is the process of switching lenders before closing?
- Considerations when Switching Lenders
- Can You Change Lenders After Closing?
What is a mortgage lender?
A mortgage lender is usually a financial institution that provides loans for the purpose of purchasing a property, typically a home. The mortgage lender provides the borrower with the funds necessary to purchase the property, and the borrower agrees to repay the loan over a specified period of time, typically 15 or 30 years.
Mortgage lenders can be banks, credit unions, or private lenders. Often homebuyers who are getting a mortgage from a lender don’t work directly with the lender but will work with a mortgage broker who guides them through the lending process.
Whether working directly with a lender or a broker, a borrower’s financial situation and creditworthiness will be evaluated to determine if they are eligible for a loan. They also determine the terms of the loan, including the mortgage rates, repayment period, and any fees or charges associated with the loan.
The mortgage process takes time.
The process of obtaining a mortgage from a lender typically involves several steps. The borrower must first submit an application, which includes information such as their income, employment history, credit score, and the property they wish to purchase. The lender will then review the application and determine if the borrower meets their lending criteria. Because of the many steps involved in obtaining a home loan, buyers need to be conscious of the timeline they are operating under, especially if they decide to work with a different lender than they worked with to get their pre-approval.
Is changing mortgage lender before closing allowed?
The simple answer to this question is yes! You are allowed to change mortgage lenders before closing, but buyers need to be aware that it’s not always advised. When switching lenders after signing a contract, you’re almost always under a time crunch.
Real estate purchase contracts have designated time restrictions, which can make it challenging to get a new mortgage lender to review a mortgage application, complete the underwriting process, and get the mortgage approved.
What are the normal time restrictions on a purchase contract?
The time restrictions that apply to a purchase contract can vary with every deal and often depend on market conditions. For example, when the real estate market is hot, buyers offer an additional incentive to sellers by electing for shorter closing periods in their offers. In other instances, buyers will choose to forgo a finance contingency. Sellers who choose not to include a finance contingency in their offer are almost always cash buyers or buyers who have high confidence in their ability to get financing completed in the closing period.
>> AGENTS ANSWER: How long does mortgage pre-approval last?
In most states, a typical closing period needs to be a minimum of 21 days. However, when financing is involved, most mortgage lenders will request their clients make offers with a closing date that’s further than 21 days from signing so that they can have confidence in getting the loan approved on time.
Buyers thinking of switching lenders should make offers with a later closing date.
Buyers who were preapproved by a lender that they would prefer not to work with or who they don’t think will be able to complete the mortgage should aim for a later closing date and a longer finance contingency period. Switching lenders while under contract requires time. The borrower will have to work with their mortgage broker, and a new lender will need to evaluate the entire loan application.
When might you consider changing mortgage lenders?
The decision to switch mortgage lenders after signing a purchase contract but before closing is not easy. Buyers are already under the stress of completing inspections and the closing date deadline. Furthermore, the mortgage you get is an important financial decision that will affect your finances for years to come, and buyers want to avoid being rushed into the decision. However, there are times when switching lenders is the right choice.
Switching lenders will get you a better interest rate.
One of the most common reasons for switching mortgage lenders before closing is that the alternative lender can offer a better interest rate. Reasonable interest rates are important for buyers because they impact their payments for years. Therefore, even a slight difference in interest rate can add up over the life of the loan.
Before committing to a new lender, compare other fees, including administration and origination fees. Also, make sure you’re not signing up for a lower interest rate at the cost of significantly higher closing costs.
Poor customer service.
Mortgage brokers and loan officers are first and foremost, sales providers who should deliver great customer service. That means being responsive to phone calls and emails and taking appropriate steps to ensure their customers are well looked after.
If a property buyer is not happy with the customer service they are receiving from their current lender, it can be enough motivation to switch lenders. Obtaining a mortgage can be a complex process and buyers want to be confident in their service provider. In addition, when going through the stressful process of buying property, you want to work with a professional who is responsive, helpful, and easy to work with.
Some lenders may try to sneak in hidden fees or charges that you were not aware of when you signed the purchase contract. If you discover hidden fees or charges you were not expecting, you may want to switch lenders.
Delays in processing.
Whether you’re working with a direct lender or a mortgage broker, delays in loan processing can happen. Keep in mind that often delays aren’t caused by the representative of your current lender, but by their support team and underwriting process. However, delays in processing are concerning, especially when you have an approaching deadline. If you are concerned about closing on time, switching to a lender with a faster processing time may be necessary.
Better loan terms.
The costs associated with a mortgage aren’t limited to interest rates. If you discover a lender offering better loan terms than your current lender, such as lower fees, lower down payment requirements, or more flexible payment options, you may want to consider switching before your closing date.
Does locking a rate commit you to a lender?
When you lock in a rate with a lender, you are committed to that rate with that lender. But that doesn’t mean you have to follow through with that loan! You can switch mortgage lenders after a rate lock.
After a rate lock, switching mortgage lenders is the only way to change your rate. While it’s frowned upon, it’s absolutely allowed.
What is the process of switching lenders before closing?
The process of switching lenders before closing is nearly identical to applying for an initial loan, only now you have a time deadline and a purchase contract in hand.
Check your purchase contract.
Before you start the process of switching lenders, it’s crucial to review your purchase contract to ensure that you are not in breach of any terms or conditions. You should look for any clauses related to financings, such as a financing contingency that outlines the timeline for securing financing and any penalties for not meeting those deadlines. You may end up with a longer timeline.
Inform your current lender.
Once you have decided to switch lenders, you should inform your current lender of your intentions. You will need to formally withdraw your loan application and provide a written explanation of why you are canceling your application. You may also need to pay any fees associated with canceling your application, such as an appraisal fee.
Find a new lender.
When you have officially withdrawn your loan application, you can start the process of finding a new lender. First, you should compare interest rates, loan terms, and customer service levels to find a lender that meets your needs. It’s also essential to check the lender’s reputation and read online reviews before making a final decision.
Start the application process.
Once you have chosen a new lender, you must start the loan application process from scratch, which will involve filling out a new loan application and providing all the necessary documentation, such as income verification and tax returns. The new lender must also order a new appraisal and title search.
Once you’ve completed the application process, the lender and their underwriting team will review your documents and advice once the loan is approved.
Close on your home.
Once your new lender has approved your loan application, you can proceed with closing on your home. You will need to sign all the necessary paperwork, including the loan documents, and pay any closing costs associated with the new loan.
Considerations when Switching Lenders
Switching lenders can be a complicated process, and there are several factors you should consider before making the switch.
- Timeframe: If you need to close on your home quickly, switching lenders may not be the best option, as it could delay the process.
- Costs: Switching lenders can come with additional costs, such as application fees, appraisal fees, and credit report fees. You should factor these costs into your decision.
- Credit score: When you apply for a new loan, the lender will need to run a credit check, which could impact your credit score. If you are in the process of closing on your home, you should avoid taking out any new lines of credit until after the closing.
- Financing contingency: If your purchase contract has a financing contingency, you will need to ensure that you meet any deadlines outlined in the contingency to avoid any penalties.
Can You Change Lenders After Closing?
Once the mortgage application is approved and closing takes place, the loan is funded. Once a mortgage is funded, the homebuyer becomes legally bound to pay the loan until it’s paid off. Consequently, changing mortgage lenders after closing is not an easy task. The only option available is to go through a refinance process.
Changing mortgage lenders after closing is not possible because the lender who provided the loan has a lien on the property, and the borrower is legally bound to pay the loan – this is not a simple process to undo. The lender has already assessed the borrower’s creditworthiness, income, and other financial factors before approving the loan. They have also verified the property’s value and made sure that it meets all the requirements for a mortgage loan.
>> AGENTS ANSWER: How do I get preapproved for a mortgage?
At closing, the loan is funded, and the borrower signs a legally binding agreement to pay back the loan according to the mortgage terms. Changing lenders after closing would require the original lender to release their claim on the property, which requires the entire repayment of the loan.
The only option available to a borrower who wants to change lenders after closing is to go through a refinance process. Refinancing involves taking out a new loan to pay off the existing mortgage. The new loan is usually offered by a different lender, and the terms may be different from the original mortgage. Refinancing can be a good option for borrowers who want to lower their interest rates, reduce their monthly payments, or change the length of their mortgage term.
Refinancing to change mortgage lenders after closing.
The refinance process is similar to the original mortgage application process. The borrower needs to fill out an application, provide financial documentation, and undergo a credit check. The lender will also appraise the property and verify its value. If approved, the new lender will pay off the existing mortgage, and the borrower will start making payments to the new lender.
Switching mortgage lenders after closing can be done, but real estate buyers need to be aware of the requirements and time considerations. Before switching, talk to your real estate agent to see if they have a recommendation for a different lender who won’t delay the home buying process.