Can You Switch Mortgage Lenders After Being Preapproved for a Home Loan?

Getting pre-approved for a home loan is a good way to show a home seller that you’re serious and financially qualified to close a home sale. It’s often used as leverage to help seal the deal and convince the seller to accept the bid.

But what if you want to back out of the preapproved loan and shop for a better loan after your bid on a home has been accepted? Can you still shop for a lender after a bid has been accepted?

The short answer is yes, but there are some important things to know if you consider this an option.

The Difference Between Prequalification and Preapproval

Prequalification and preapproval are sometimes used interchangeably, but it’s essential to know they are quite different. 

Prequalification is often a good idea to get a general idea of how much you can borrow and at what interest rate when shopping for a home. Potential buyers usually get prequalified at the start of the process to create general guidelines to help focus their efforts.

Prequalification figures are not set in stone, and this process does not represent a firm commitment.

Getting pre-qualified is quick and easy and is sometimes completed online in minutes after answering some questions about your finances. Part of this process also involves a credit check.

While prequalification can be an excellent option early in the home buying process, if you’re ready to buy soon, you may skip prequalification and go straight to a preapproval process instead.

Preapproval is a more formal and detailed process. You need to verify the information you supply to a lender, and you do that by providing written documentation. Some of that documentation may include:

• Two years of tax returns and earnings statements (W-2s, 1099s, etc.)
• Savings and investment account statements
• Verification of your employment and recent pay stubs
• A copy of your driver’s license
• Your rental or mortgage payment history

After reviewing your documentation, the lender will also do a hard credit check and review the details. From this, they’ll provide a written document showing how much they will lend you and the estimated interest rate.

This does not guarantee you’ll ultimately be approved for a loan, but it is a better indicator of helping you clarify if you can afford a home you’re hoping to buy. 

It can also give you an edge when multiple offers are on the table for a property. Sellers are often more likely to accept offers only from preapproved buyers. 

Many lenders charge a fee for loan preapproval. You’ll also need to complete a mortgage application.

One key thing to note is that preapprovals are usually only good for 60 to 90 days, so you should consider that based on how serious and far along you are in the home buying process.

A preapproval or prequalification for a home loan does not commit you to a specific lender, though you may lose your fee if you back out of the loan with that lender.

After being preapproved, a buyer is free to compare and shop rates from the lender that initially preapproved them.

Can You Switch Lenders?

You can change a mortgage lender at any point before making an offer, having it accepted, and closing the sale, but there are some things buyers need to be aware of before doing so.

The most important of these is that you are usually under a time restraint after signing a purchase contract. Most sellers want to close on a property between 30 and 60 days after reaching an agreement.

That makes it difficult to get a new lender to review a mortgage application, complete the underwriting process, and approve the mortgage.

Also, you won’t be able to switch lenders if you’ve signed a contract with the lender that states you can’t switch lenders. But such a stipulation is uncommon.

Read your contract and keep your financing options as open as possible. If possible, include a broad finance contingency that says you get your earnest money back if you can’t obtain financing that meets certain terms or criteria.

Why You Might Consider Switching Lenders

Switching mortgage lenders after signing a purchase contract but before closing is possible but usually not easy. Signing a purchase contract triggers several other activities, such as completing inspections, preparing to move, possibly selling an existing home, and other time-intensive actions.

Additionally, getting the best possible mortgage is one of the biggest financial decisions you may face in your lifetime, and most people don’t want to be rushed into it.

However, there are times when switching lenders is the right choice.

Getting better loan terms.  If you can find more favorable terms, that could amount to thousands of dollars in savings over the life of the loan. Even a small difference in a loan rate can compound and add up in your favor over time.

Your current lender may be able to find a lower interest rate unless your rate is locked. However, the interest rate is usually locked in after the contract is accepted, and lenders will usually only make changes if it is significantly better for a borrower.

Dealing with higher fees.  It’s a good idea to compare fees, including administration, origination, and similar add-ons, that could pile on a lot of additional closing costs. This may not make it worthwhile to change lenders, but it can be used to sway a final decision. 

Poor customer service. If your current lender is non-responsive or takes too long to get back to your phone calls and emails, this could be a red flag for future encounters. Mortgage brokers and loan officers are in the customer service business and should be highly sensitive to the fact that this is the largest transaction most people will undertake in their lives.

When they fall short, are unprofessional, or not easy to work with for any reason, that’s another reason to be concerned.

Understand that delays sometimes occur, and it’s important not to misplace your anxiety on a lender when it may not be their fault. During the underwriting process, ask questions so you fully understand where the issues are and who is responsible for resolving them.

If you are concerned about closing on time, switching to a lender with a faster processing time may be necessary. In addition, if a borrower changes lenders, they should be transparent with the listing agent and seller on the reasons for the change.

When a borrower switches, they need to ensure that the new lender can close the loan on time and meet all of the necessary dates and deadlines within the real estate contract.