Switching Lenders After Preapproval: What to Know

Starting the process over with a new lender could mean it takes longer to get to closing.

During the homebuying process, you'll likely get preapproved or prequalified for a home loan. This gives you the information you need to understand your mortgage costs, how much you can borrow, and what homes you can buy.

Your prequalification or preapproval letter can also help sellers see that you're serious about buying, so you should provide it when you make an offer.

But what happens if you're thinking about making an offer and you decide that you want to change lenders? The good news is that it's legal and possible to do so, but there are some risks and downsides to consider before moving forward. This guide explains how it works and what you should know before you make a switch.

Can You Switch Mortgage Lenders After Preapproval?

Regardless of whether you get prequalified or preapproved, you are allowed to change lenders at any time during the homebuying process.

However, after you get mortgage preapproval or mortgage prequalification, you will need to think carefully about whether it is a good idea to start over with a new lender for your mortgage loan. This can differ depending on what phase of your homebuying journey you've reached.

• If you haven't found a house yet: If you haven’t yet found a house, there's no real risk involved in changing lenders. You still have time to go through the loan prequalification or preapproval process again, and you likely won't have paid many fees (like appraisal fees) to your current lender.
• If you're already under contract: There is more risk at this point, because you may not be able to get through the loan approval process in time to close. You may also have to get a new appraisal and will lose any fees you've already paid to your lender. Moving quickly is key to avoiding derailing your home sale.

When You May Want to Change Your Lender

There are some good reasons why you may decide to change your lender even after preapproval or prequalification. Here are some reasons you may want to make a change:

• To get a better rate: If you find a mortgage offering a lower interest rate, changing to that lender could make sense since doing so could allow you to save money on your home loan over time.
• To pay less in closing costs: If a different lender allows you to pay lower closing costs, changing lenders may make sense. The less you pay in closing costs, the more money you get to keep for other expenses.
• To find a better consumer experience: If you have experienced poor customer service from your current lender, you may want to make a change. You don't want to find yourself dealing with a lender that makes mistakes like losing documents, is unwilling to answer questions, or otherwise makes the transaction difficult.

If you have a good reason for changing your lender, it is worth exploring whether the pros of making a switch outweigh the cons.

Considerations When Switching Lenders

Before you move forward with changing lenders, there are a few key things to consider. These may not apply in every situation, but they are worth looking into.

Credit Impact

When you change lenders, your new lender will review your credit report and credit score. This could mean a new inquiry on your credit record, and too many inquiries can reduce your score.

However, if you are switching within 45 days of your initial inquiry, the Consumer Financial Protection Bureau explains that the new inquiry related to mortgage preapproval or prequalification should be grouped with the old one and will not count against you. This is one reason to act quickly if you're committed to switching.

New Fees and Lost Fees

When you switch lenders, you will lose any fees you have already paid to your current lender.

If you already had a home appraisal, for example, you may not always be able to switch the appraisal to your new lender, as there are specific guidelines that would have to be met to do so. Your new lender will likely also obtain a new credit report, even if your old lender pulled your report already. This could potentially mean you must pay fees again with the new lender.

Extended Timeline

When you change lenders, you'll be starting the process of getting approved all over again. This could mean that your closing date must be pushed back. The closing process typically takes around 30 to 60 days, and it could take even longer when you move to a new lender and start over from square one.

How Switching Lenders Before Closing Works

If you are considering switching lenders before closing, here are the steps you'll likely need to take.

• Compare loan offerings: You should compare the different rates and terms from your current lender against other available lenders. Be sure that the lender you're working with offers the types of mortgage loans you're interested in and that you're comparing similar loans (such as comparing an FHA loan to an FHA loan).
• Get preapproved or prequalified again: Getting preapproved or prequalified is a key part of the homebuying process. You will need to go through that process again with a new lender to make sure you understand how much you can borrow and at what terms.
• Communicate with your current lender and the seller: You need to let your current lender know to cancel your application and alert the seller to the fact that you may need a longer closing time. A real estate agent can help you with this step.

Once you have decided to switch lenders and choose your new lender, you'll need to submit a full mortgage application, go through the mortgage underwriting process, and get full approval to close on your loan.

Switching Mortgage Lenders FAQs

Still need to know more? Here are the answers to some frequently asked questions about switching mortgage lenders.

When Is It Too Late to Change Mortgage Lenders?

You can change mortgage lenders until you sign the closing documents. However, changing late in the process can trigger a second inquiry that affects your credit score, set back your closing date, and cause you to pay multiple sets of fees.

When Is Switching Lenders Worth the Risk?

Switching lenders may be worth the risk if doing so won't jeopardize your home purchase and if your new lender offers a better rate, lower closing costs, or better customer service.

Can You Get a Better Deal Without Switching Mortgage Lenders?

You may be able to get a better deal on your home loan without switching mortgage lenders. You can refinance your home loan with your current lender after closing if rates drop or your finances improve and you qualify for a more affordable loan. Refinancing can also allow you to access equity, as well as change your rate.

If you are struggling with your loan, you can also discuss a loan modification with your lender.

Final Thoughts: Finding the Right Lender for Your Homebuying Experience

Finding the right lender in the first place can be a lot easier than changing lenders in the midst of the process. Freedom Mortgage is here to help you explore all loan options to find the best loan for your needs. Contact Freedom Mortgage today to speak with a loan professional about your borrowing options.