Changing sides in the mortgage game
The urge to switch mortgage lenders is not uncommon among mortgage borrowers. This sometimes happens because borrowers are rarely in the mortgage marketplace, and real estate financing can be complex. Everybody wants to get the best rates and terms — with good reason. Even small changes in mortgage rates can have big financial consequences over time.Find rates in today's mortgage market now (May 31st, 2020)
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One reason for borrower uncertainty concerns the shopping process. In many cases, borrowers do not shop around. They wonder: could I do better? And halfway through the loan process, they realize that they can, and they start over with another company.
According to the Consumer Financial Protection Bureau, studies have found that “more than 30 percent of borrowers reported not comparison shopping for their mortgage, and more than 75 percent of borrowers reported applying for a mortgage with only one lender.
“Previous Bureau research suggests that failing to comparison shop for a mortgage costs the average home buyer approximately $300 per year and many thousands of dollars over the life of the loan.”
So, avoid jumping ship to get a better rate. Pick the best ship before you apply for a mortgage.
Of course, money is not the only issue. An unresponsive loan officer or lost paperwork can cause borrower dissatisfaction — and an urge to look around.
Borrowers sometimes wonder if they can switch lenders at all. The answer is generally yes, but the bigger question is whether a change makes sense.
The mortgage process requires lenders to provide each borrower with a Loan Estimate. This is a standardized three-page form which outlines the key terms and provisions of the mortgage offer. The lender must send out the Loan Estimate within three business days of receiving your application.
The Loan Estimate is a curious document. It shows the lender’s offer but the borrower is not required to accept those terms or use that lender. You can continue to shop around.
The credit report
Financing rules generally prohibit lenders from charging a fee until you have received the Loan Estimate form and told the lender you want to go ahead with financing. The exception to the rule is that the lender can charge a fee to obtain a credit report. This is generally a minor amount.
Many lenders charge an application fee. The amount charged varies widely. Whatever it is, once paid it typically will not be returned if you switch to a different lender.
Appraisals are not generally portable; that is, one appraisal can typically only be used by one lender. Get another lender, and you’ll likely need another appraisal. That means two appraisal fees. The exception is that under the FHA program, appraisals are required to be portable.
“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.”
Look before you lock
Lock-ins are a big reason that borrowers choose to switch lenders. Imagine that you lock in a 30-year mortgage at a 4.5 percent rate for 30 days. And then a week later, rates drop to 4.25 percent. Are you stuck?
Even if you let your lock expire, and don’t close within 30 days, most lenders won’t give you the lower rate at closing. You’ll get either the rate you locked, 4.5 percent, or a higher rate if interest rates rise before you complete your deal.
One way to avoid this is by choosing a “float-down” option that lets you close at a lower rate if interest rates fall while you’re locked.
If mortgage rates fall significantly after you lock in your loan, it may be worth starting over with a new lender to get the better rate. But that depends on the size of your loan and the difference in interest rates. If a new appraisal costs $800, for instance, it won’t make much sense to switch lenders to save $5 a month. But if a new loan would save you $300 a month, that’s different.
If you are locked in with one lender, and rates drop a really significant amount, and your current lender is unwilling to negotiate a lower rate with you, it might make sense to cancel your loan and switch lenders.
Probably the most potent problem associated with switching lenders has nothing to do with mortgage rates or closing costs. In a typical purchase situation, closing must take place on or before a given date. It’s the buyer’s obligation to obtain financing in time. This means you must quickly apply for a mortgage and supply all required information and documents.
If you switch lenders, the entire application process will begin anew. There are no stone tablets which say the second lender will be any better than the first. It’s still possible for paperwork to be lost. There can be delays. For instance, HUD gives FHA lenders five days to transfer appraisals. That may be quicker than a fresh appraisal, but there may not be many days to close.
If switching lenders delays closing, a number of serious problems can develop. Can you lose your deposit? Can the transaction fall through? Will the seller be unable to purchase a replacement property? If that happens, will the seller see you as being responsible for any losses from his or her purchase agreement?
If changing lenders seems attractive, especially in a sale situation, speak with your broker or attorney before switching lenders. The act of switching, by itself, may represent costs and risks that are potentially much bigger than expected.Verify your new rate (May 31st, 2020)