Switch Mortgage Lenders? Sometimes, You Just Have To
For some borrowers, the lending process is complex and difficult. The lender and you are simply not compatible, and delayed paperwork, misplaced information or technical problems bog down the application. It may be time to switch mortgage lenders.
A just-released study by J.D. Power found that “among mortgage customers, 17 percent said they regretted choosing the lender they ended up with.”
What’s Your Obligation To The Mortgage Lender?
Whatever the reason, as a borrower, you have a right to switch mortgage lenders.
But what happens if you do?
If you want to consider financing from a given lender, it must issue you a Loan Estimate. That’s a formal document which explains the loan and its various terms. This document must be delivered to you by the lender within three business days of receiving your application.
While it creates obligations for the lender, it does not compel the borrower to accept the loan or use the lender. You are free to switch mortgage lenders.
Credit score inquiries fall into two groups, hard and soft. With a soft inquiry, there is no credit score impact.
For instance, you receive a letter in the mail saying you have been pre-approved for a mortgage based on your credit score. You did not give permission for the lender to pull your score so there is no impact. It’s a soft inquiry.
A hard inquiry — such as the credit check you authorize for a mortgage application — can cause you to lose a few points. For most borrowers, the change should have little consequence. However, in some cases, a few points can move you from one credit bracket to another.
If you switch to a second lender, this will trigger a new inquiry. Since you authorized the lender to check your credit, it’s a hard inquiry.
However, credit scoring programs allow you to “rate shop” and count all inquiries for a single mortgage or car loan within 45 days as a single hard inquiry. So, no harm, no foul.
Except for a credit report charge, generally a minor amount, a lender cannot charge any fee until you have received the Loan Estimate and said you want to apply for financing.
In effect, you have at least three days to switch lenders without any additional cost beyond the credit report charge.
The term “application fee” does not appear in the Dodd-Frank legislation so there does not appear to be any requirement for a refund.
The Mortgage Reports asked the Mortgage Bankers Association if there are any rules regarding an obligation to refund application fees.
According to Elizabeth Kemp, Assistant Regulatory Counsel for the Mortgage Bankers Association, “We’re not aware of any federal requirements that would require a lender to refund an application fee.
In general, state laws address the refunding of fees. I don’t know of a specific state that would require a refund of the application fee, but a state statute could require a refund.”
Translation: While there is no federal application refund requirement, you might find one at the state level. For details, ask the lender or an attorney.
Francois (Frank) K. Gregoire, an appraiser based in St. Petersburg and a nationally-recognized valuation authority, says the ability to move an appraisal from one lender to another is generally “hit or miss” except with FHA financing. A firm rule applies to FHA home loans.
“In cases where a Borrower has switched Mortgagees,” says HUD, “the first Mortgagee must, at the Borrower’s request, transfer the appraisal to the second Mortgagee within five business days.”
In other words, you have to ask the first lender to transfer the appraisal with an FHA loan application and the lender must respond.
“Appraisal portability is not universal in the conventional lending world,” says Gregoire. “In addition to Fannie Mae and Freddie Mac appraisal requirements, many lenders have appraisal requirements that overlay and enhance the Fannie and Freddie minimums.”
The bottom line: You have to speak with individual lenders to determine their policies.
Borrowers should use care and caution when switching lenders, because problems can arise. For instance, can you get the same rate – or a better rate – with a new lender?
Will your closing costs be the same or lower? Can the lender deliver on a timely closing?
A delayed closing can mean violating the sale agreement. In that case, borrowers may face big penalties. The property purchase may be lost. Be aware of setting off a chain of events: if your closing is, late will that impact the seller’s purchase of a replacement property?
Will the sellers lose their loan lock-in? What if the sellers cannot purchase their next property without the funds from your closing and their sale falls through?
For specifics relating to your transaction, speak with your broker or attorney before switching lenders.
What Are Today’s Mortgage Rates?
Rates may be the reason you’re considering a switch. If that’s the case, make sure that you’re getting accurate quotes from competing lenders.
Provide them all the same information your current lender has — FICO scores, loan-to-value, debt-to-income ratios, and property information — to get results you can compare.