Mortgage BasicsCan I Switch Mortgage Lenders?

Can I Switch Mortgage Lenders?

“Shopping around for a mortgage lender” is one of the most common pieces of advice you will hear when buying a house. Although your mortgage rate will depend heavily on your credit score, the type of mortgage you are applying for, and so on, so will the mortgage company you set your heart on.

However, many things can come up during the home buying process and make you rethink your relationship with your mortgage lender. Common issues include repeated delays, hidden costs, and lack of responsivity, which could affect a successful and stress-free closing. If you are having a bad experience with your current lending institution and are considering switching to a new mortgage provider, or if the mortgage rates suddenly drop, you are in luck: yes, you can change lenders. However, it is not always a walk in the park.

Consequences of Switching Mortgage Lenders

Although switching lenders can have benefits (getting access to a better rate or better customer service, for example), it can also come with some inconveniences. Here are some things you will need to keep in mind if you want to switch to a different lender.

  • Closing delays: You essentially have to start the mortgage application process from square one when you switch lenders. Closing on a mortgage typically takes between 30 and 45 days, although some mortgage lenders can offer faster closing times. However, the delay can still affect your real estate deal. The sellers may request that you pay a daily fee, or the deal may fall through if the mortgage closing process drags through. In that case, the seller is entitled to keeping the earnest money since the delay is considered a breach of the contract.
  • New credit score: Hard inquiry credit check can affect your credit score – especially if it has been a while since your previous credit applications. Credit institutions count hard inquiries as one when they are close together, usually 14 days for older scoring models and up to 45 days for newer ones. So if you are applying for a mortgage with several lending institutions within a couple of days, you don’t have to be worried about hurting your credit score. However, all bets are off if you change lenders later during the home buying process. It could also be an issue if your credit score decreased since you were approved by the previous lender.
  • Higher interest rate: As you are likely aware, interest rates are rising. If you switch lenders, you will lose any previously locked-in rate that was likely lower. Although the difference may seem minimal, it could represent thousands of dollars throughout the life of the loan.
  • Fees: Since you are starting the mortgage application again, you will need to pay any associated costs and fees again, including credit report fees, appraisals, closing costs, etc., since many of these expenses and reports do not transfer to the new lender.

If you are considering changing mortgage providers, you should do so as soon as possible to avoid additional delays and adjust your finances accordingly if the fees incurred may affect your home-shopping budget (down payment, for example.) You should also inquire ahead of time with your new lending institution about the delay you can expect and keep the home sellers (if you are under contract in particular) updated on any new developments to avoid frustration and miscommunication.

Switching Mortgage Lenders After Pre-Approval

Being pre-approved for a mortgage shows potential sellers that you are motivated and that you are in a position to purchase the property you are interested in. In many cases, being pre-approved helps convince sellers to accept your offer since it can signal a smooth-sailing closing.

When you’re pre-approved, your mortgage underwriter has reviewed the necessary documentation, including W-2 forms, asset statement, checking account statement, list of debts, and pulling a credit report. You will receive a pre-approval letter stating that the lender is willing to lend you a certain amount of money. However, you do not need to stick with this lender unless you signed a contract with the home seller stating that you will not change lenders (a rare occurrence.)

Most real estate transactions close within 30 to 60 days. If you think you can secure new financing within this time frame, you should have no difficulties switching lenders as long as the type of loan you are applying for remains the same. For example, using an FHA loan instead of a conventional loan could result in longer delays since FHA appraisals are stricter. Your real estate agent can also file for an extension if the odds are not looking in your favor.

It may also be best to let the seller know that you are switching lenders and the reasons behind the change to avoid miscommunications. For instance, if you switch lenders because of how they handle customer service, you do not want them to assume that your credit score or finances prevented you from being approved.

Switching Mortgage Lender AFter Locking In a Mortgage Rate

Your mortgage lender may offer to lock in your mortgage rate (for free or for a fee) to avoid higher rates as long as none of the other information provided in your application (credit score, income, type and length of the mortgage, etc.) change. You may have an option for a one-time “float down” rate, which allows you to lower your interest rate if they decline. The locked rate is valid for an agreed-upon period. On average, the lock periods range from 15 to 60 days, occasionally longer.

You may still choose to change lenders, but the lock-in agreement will not carry over to your new provider. Besides, the closing may be delayed if you run into a longer-than-expected approval time. Keep your real estate agent informed if you have any doubts since you may need to arrange for a new timeline for closing on the property. Changing lenders will also increase your closing costs. The good news is that you will not face any consequences from your mortgage lender for backing off until the loan contract is signed at closing.

Switching Mortgage Lenders After Closing

Refinancing is your only option if you wish to change mortgage lenders after the sale has closed. If you are disappointed in your current lender’s customer service or the mortgage rates drop suddenly, refinancing with a new loan company may be your best bet. A second mortgage could also give you access to other advantages, such as shorter loan terms, access to cash using your home equity, debt consolidation, or dropping private mortgage insurance (PMI).

Besides, since mortgages are long-term loans, it is relatively common in the industry for the mortgage company that originated the loan to transfer the debt over to a new lender. Often, they can do so without any approval or input as to who the new lender may be on your end. The original loan service will inform you by mail within 15 days of the following due payment, providing the name and information of the new company.

Refinancing your mortgage allows you to regain control of who your mortgage provider should be and renegotiate more advantageous terms for the new loan if applicable.

Final Thoughts

While switching lenders could complicate your closing process and potentially increase your closing costs, it is certainly not impossible. If you’re considering switching, you should do so as soon as possible to avoid further delays in your closing timeline. Especially in today’s competitive housing market, properties can be sold in as short as two weeks. In that case, the best strategy might be to close first, so you don’t lose your dream home. You can always refinance later after closing.

Alix Barnaud

After graduating with a Master’s degree in marketing from Sciences Po Paris and a career as a real estate appraiser, Alix Barnaud renewed her lifelong passion for writing. She is a content writer and copywriter specializing in real estate and finds endless fascination in the connection between real estate, economic trends, and social changes. In her free time, she enjoys hiking, yoga, and traveling.