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Should you switch mortgage lenders before closing a home?

On Behalf of | Oct 30, 2023 | Real Estate Law

Making a major home purchase often requires getting a mortgage. This involves working with a mortgage lender through the home-buying process. Not all buyers have a good working relationship with their financier, however.

If you have second thoughts about sticking with your current bank or lender, your experience is not unique. Sometimes homebuyers leave a bank and look for another institution to finance a home loan. Still, it is not always wise to switch lenders before closing. There are pros and cons to consider.

Possible problems with switching lenders

Changing lenders could delay closing the real estate transaction since the new lender must start the application and approval process from scratch. This includes paperwork, underwriting, and appraisals. Delays can frustrate sellers. In extreme cases, the seller could cancel the deal and keep your earnest money deposit.

Switching lenders also requires another credit check. While soft inquiries do not affect your credit score, a hard inquiry can if there are multiple queries scattered across time. However, if multiple lenders check your credit in a 45-day period, your FICO score will only count the inquiries as one, which should not impact your score.

If interest rates fall, a new lender may offer better terms. Still, rates could also increase between application and closing. Locking in an interest rate does not guarantee that rate if you switch lenders. You would need to relock at the current rate offered by the new financier.

The positives of going with a new lender

There are scenarios where changing lenders is unavoidable. The initial lender may deny the mortgage or cannot finance the property. In other cases, the benefits of a different financier outweigh the drawbacks for buyers unhappy with the service or rates offered by their present lender.

Sometimes a lender exhibits red flags such as poor communication, disorganization and sudden cost changes. These warrant looking at alternatives before closing. If another lender offers better service, fees or interest rates, the switch may be worthwhile if you can pull it off quickly.

Homebuyers should do due diligence upfront to find the best lender. Still, extenuating circumstances happen during the homebuying journey. If you have concerns about your lender, weigh the time crunch, costs and risks versus the potential rewards of switching.