Can I Cancel a Mortgage Loan After Approval?

Mortgage loan approval provides a borrower with a conditional commitment from a lender, confirming they meet initial criteria. However, this approval is not always a final obligation. Borrowers retain rights to alter their course, depending on the loan process stage. Understanding these possibilities is important for navigating mortgage financing.

Canceling Before Loan Closing

Before the official loan closing, a borrower can cancel a mortgage loan. The loan commitment at this stage is not fully binding, and formal penalties for withdrawal are uncommon. Borrowers might cancel to secure a more favorable interest rate, decide against a property purchase, or due to changes in personal financial circumstances.

To cancel before closing, the borrower must formally notify the lender in writing. While the loan is not yet funded, certain upfront fees paid during the application process are non-refundable. These include costs for services already rendered, such as an appraisal fee, a credit report fee, and an application fee. These fees cover administrative expenses and services provided by the lender.

Canceling a mortgage application before closing has minimal impact on one’s credit score. A “hard inquiry” from the initial credit check remains on the credit report, but no debt was incurred or defaulted upon. The temporary dip in credit score from the inquiry is minor and lessens over time. This stage avoids more complex financial and legal implications that can arise after a loan has been fully disbursed.

Canceling After Loan Closing (Right of Rescission)

After a mortgage loan officially closes and funds are disbursed, the Right of Rescission may allow borrowers to cancel the transaction. This legal right, part of the Truth in Lending Act (TILA), provides a “cooling-off” period. It allows borrowers to cancel a signed transaction without financial penalty.

The Right of Rescission applies to mortgage refinances, home equity loans, and home equity lines of credit (HELOCs) secured by a borrower’s primary residence. It does not apply to original purchase mortgages, loans for investment properties, or vacation homes. If refinancing with the same lender, the right of rescission applies only to new funds borrowed beyond the original principal amount.

To exercise this right, a borrower must provide written notice to the lender within three business days. This period begins after the signing of loan documents, receipt of the Truth in Lending disclosure, and receipt of two copies of the Notice of Right to Cancel. Saturdays are business days under TILA, but Sundays and federal holidays are not. If the lender fails to provide required disclosures or notice, the rescission period can extend up to three years.

Upon receiving a valid notice of rescission, the lender must void the security interest in the property. The lender must return any money paid by the borrower, including closing costs, application fees, and appraisal fees, within 20 calendar days. If the borrower received funds from the transaction, these must be returned to the lender after the lender fulfills its obligations. Rescission unwinds the transaction, removing the lien from the property.

Potential Costs and Future Considerations

Canceling a mortgage loan, whether before closing or through the Right of Rescission, involves financial implications. Before closing, primary costs are non-refundable fees for services already completed. These include appraisal fees (typically $450-$650), credit report fees ($25-$100), and application fees ($0-$500). These out-of-pocket expenses are not reimbursed if the loan application is withdrawn.

If the Right of Rescission is exercised after closing, financial consequences differ. The loan is voided, and the lender must refund amounts paid by the borrower, such as closing costs and interest. Any funds received by the borrower must also be returned to the lender. This ensures that neither party is unjustly enriched by the transaction. The specific amounts returned depend on the terms of the rescinded loan and payments made by each party.

Canceling a loan application or exercising the Right of Rescission has minimal negative impact on credit scores. The initial “hard inquiry” from the credit check will remain on the credit report, causing a small, temporary dip. However, since no debt was incurred or defaulted on, no adverse payment history is reported. The borrower’s long-term creditworthiness remains largely unaffected if they maintain other good financial habits.

For future mortgage applications, a prior cancellation does not pose a significant barrier. Lenders understand that circumstances change, and a withdrawn application or rescinded loan is not viewed as a negative indicator. Transparency with future lenders about the reasons for cancellation can be beneficial. Borrowers should retain all documentation related to the cancellation, including written notices and confirmations, for future financial endeavors.