Being preapproved for a home loan by a lender is a good way to show a home seller that you’re serious and are financially qualified to make a fast close on the contract. It can 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?
Yes, switching lenders at the last minute is possible in most cases, but it could tie up the sale or cause it to fall through, among other downsides. If market conditions have improved enough where you can get a lower interest rate and loan terms, it might be worth it to shop around one last time and see if lenders can give you a better deal on the house you’ve already picked out and had a bid accepted on.
First, get preapproved
A prequalification happens by answering questions over the phone. Preapproval requires furnishing documents, Hosterman says, that prove your income to a lender. These include W-2 forms, asset statement, checking account statement, list of debts, and pulling a credit report. A preapproval shouldn’t take long.
“It can happen extremely quickly,” Hosterman says. “It can happen in minutes. It’s just a matter of how fast the client can get their information.”
After the borrower’s information is verified, the lender will issue a preapproval letter stating it will lend up to a certain amount, provided other conditions are met. It’s proof to a seller that you can get a mortgage to pay for the home. Many lenders will charge a fee to be preapproved for a loan, and a mortgage application will also have to be filled out.
Neither a preapproval or prequalification for a home loan commits you to a specific lender, though you may lose your fee if you back out of the loan with that lender.
After being preapproved, the buyer will then typically shop rates from the lender that initially preapproved them, Hosterman says.
Can you switch lenders?
If you’ve been preapproved for a loan and a home seller has accepted your bid, do you have to stick with that lender? No — unless you’ve signed a contract with the lender that states you can’t switch lenders. But such a stipulation is uncommon, real estate experts say.
“It is extremely uncommon for a contract to specify the exact financial product or exact lender that a buyer will use to finance the home purchase,” says Luke Babich, a real estate agent and chief security officer at Clever Real Estate, nationwide referral brokerage based out of St. Louis that connects home buyers and sellers with real estate agents.
“Even when those details are specified, there is generally no language explicitly preventing the buyer from changing things up,” Babich says.
“There is usually no risk or consequence for the buyer to find new financing — as long as they can get financing within the time-frame specified by the contract,” he says. “Most contracts do specify that buyers have a specific time period within which they have to get financing and perform.”
Read your contract and keep your financing options as open as possible, Babich recommends. “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,” he says.
When to shop for lenders
If your bid has been accepted by a home seller, closing the deal typically takes 30 to 60 days, Hosterman says. Of course, your real estate agent could ask for an extension.
“After a bid gets accepted, that’s typically when they’ll shop around for better rates,” he says, adding that waiting until the last two weeks of closing to shop is cutting it close.
A change in lenders shouldn’t hurt a seller, Hosterman says, though it’s something they should be made aware of. Moving to a different type of loan, such as from a conventional to an FHA loan, could affect the seller, he says, because FHA loans require more stringent appraisals that could delay a sale.
A drop in mortgage interest rates is the biggest reason to switch lenders. Still, your current lender may be able to move your loan to a lower interest rate unless your rate is locked. The interest rate is usually locked in after the contract is accepted, and lenders will usually only change it if the terms can be significantly better for a borrower, Hosterman says.
If any earnest money has been given to the seller, that money could be at stake if deadlines in the contract aren’t met by trying to find a new lender.
Sellers and real estate agents will likely assume that the initial lender listed on a preapproval letter is going to be the buyer’s lender. Don’t leave them out of the loop and let them assume your switching lenders because the first lender later decided you didn’t qualify for a loan.
“If the client changes lenders they should be transparent with the listing agent and seller to assure them the client switched lenders merely for a better rate or closing costs,” Hosterman says. “Should a buyer switch lenders they need to make sure that the new lender can close the loan on time and meet all of the necessary dates and deadlines within the real estate contract.”
That’s key to buying a home — meeting all of the deadlines in your contract. Wait too long to shop for the best loan rate and miss some deadlines, and you could lose the chance to buy the home you want.