Can You Change Lenders Before Closing?

It is possible to change mortgage lenders before closing a home purchase. While the mortgage process can appear intricate, borrowers retain the right to re-evaluate their financing options and select a different lender. This flexibility allows individuals to pursue more favorable terms or a better experience.

Feasibility of Switching Lenders

Borrowers can change mortgage lenders at nearly any point before the loan is officially issued. Federal consumer protection laws safeguard this right, allowing individuals to withdraw from a loan agreement prior to its finalization. The most viable times for a switch are early in the process, such as after receiving an initial pre-approval or during underwriting. Switching lenders during underwriting is common but can introduce delays.

The point of no return for switching lenders is usually after signing the final loan documents at closing. Once the loan agreement is signed, the only way to change lenders is through a refinance process. This involves taking out a new loan to pay off the original one.

Critical Considerations Before Making a Change

Switching lenders involves evaluating several factors that can impact the home purchase. A new lender may require a new appraisal, especially if the previous one was conducted by a different appraiser not accepted by the new institution. Appraisal fees typically range from $300 to $600, and this cost would be borne by the borrower again. Some new lenders might also charge application fees, which can range up to $500.

Switching lenders can also affect the closing timeline, potentially causing delays. Real estate purchase contracts often include financing contingency clauses, which specify a timeframe, typically 30 to 60 days, within which a buyer must secure financing. Missing this deadline can lead to complications, including the seller potentially canceling the sale or imposing per diem charges for each day of delay. These daily fees can amount to several hundred dollars.

A new loan application with a different lender will involve another credit check, known as a hard inquiry. While multiple inquiries for a mortgage within a specific timeframe, generally 14 to 45 days, are typically grouped and counted as a single inquiry to minimize impact, each hard inquiry can still slightly lower a credit score by a few points. It is advisable to avoid applying for other types of credit, such as credit cards or personal loans, during the mortgage process. These inquiries are not grouped and can have a more significant impact on credit scores.

Steps for Initiating a Lender Change

Initiating a lender change requires gathering financial documentation. A new lender will need various personal and financial records to process a new loan application. These include photo identification, proof of Social Security Number, W-2 forms from the last two years, and recent pay stubs covering the last 30 to 60 days.

Documentation of assets is also necessary. This includes bank statements from checking and savings accounts for the past two months, and statements for investment accounts like stocks, bonds, mutual funds, or 401(k)s from the last quarter. For self-employed individuals, profit and loss statements and business tax returns from the last one to two years will be required. Organizing these documents in advance is helpful to streamline the application process.

Borrowers should obtain a Loan Estimate from any potential new lender for comparison. This standardized three-page document details the estimated costs, interest rate, monthly payments, and other terms of the loan. Comparing these estimates allows for an informed decision, focusing on the interest rate, origination charges, and total closing costs. Once a new lender is chosen, a new loan application can be submitted, providing all the necessary information.

Completing the Lender Switch and Closing

Once the new application is prepared, the procedural actions commence. The new application needs formal submission, followed by the new lender’s underwriting process. Underwriting involves a thorough review of the borrower’s financial information and the property details to assess risk and finalize loan approval. This stage can take several weeks.

Upon loan approval, the new lender will issue a Closing Disclosure, which details all final loan terms, fees, and closing costs. Borrowers must review this document carefully at least three business days before closing. Coordination of the new closing date with all parties involved, including the real estate agent and the seller, is then necessary to ensure a smooth transition.

Finally, the original loan application must be formally withdrawn or canceled. This step should occur once the new loan is secured and nearing completion to avoid any gaps in financing. Communicating with the original lender about the decision to proceed with another institution helps manage expectations and conclude the prior application process appropriately.