Beginner's Information: February 2007 Archives

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Can I change lenders after the loan is approved?





The answer is yes, if you don't mind starting the loan process all over again.



Actually, you can change lenders any time you want to. It may be expensive, it may be counter-productive, and it may or may not be an intelligent choice, but it is your choice. It's not like the lender can do anything about it.



There can be external factors that prevent you from doing so. If you owe $500,000 on a property that has fallen in value to $450,000, you're not going to be able to refinance on any kind of decent terms unless you pay that loan down. If your credit is no longer as good as when you last got a loan, if your monthly bills are too high a proportion of your income, or any of a couple dozen other possible reasons, you won't be able to obtain financing as good as your current loan. This doesn't mean that you cannot legally decide to take something less advantageous. People voluntarily take out negative amortization loans all the time, no matter how much they hurt themselves with them. It's all tied up in the freedom thing, even if it does mean you're free to make mistakes.



Just because you are free to change lenders, does not mean that there will not be consequences. That's also part of the freedom to make your own mistakes. It can be very expensive to change lenders. You are basically back to square one when you change lenders, a fact many loan providers make rapacious use of when they pull a bait and switch routine. I add that in the vast majority of these cases, that bait and switch was planned with malice aforethought, as you know if you're a regular here.



When you decide to begin the process over, you may or may not have to do everything over. If you're at a direct lender, there's no alternative. You have to do the loan paperwork all over. Credit Report and everything else, application and all the disclosures. If you did some work ahead of time so that you're the one who controls the appraisal, you may not have to pay for a new appraisal, but most folks have to get a new appraisal. If you put down a deposit with the lender, you're likely to lose it. They did all of this work, and they're not getting paid for a funded loan. It's rare that lenders will refund deposits. That's why they require them, to commit you to the loan and prevent you from changing your mind. Mind you, the consequences of agreeing to a bad loan are usually much worse than losing the deposit, but people are silly about cash deposits.



When you change lenders even though you're staying with the same broker, the consequences are much smaller. Since the application, etcetera, should have all been done in the broker's name, the loan officer has to begin the underwriting process all over, but the basic paperwork is pretty much the same. They have to give you new copies of the required paperwork reflecting the new loan, but that's it. On the other hand, if there's something underhanded going on, it's almost certainly the doing of the loan officer, so staying with the same brokerage is likely to be perpetuating the problem. This applies to direct lenders as well.



There is always a moment of truth in every loan, when the final loan papers are presented. If they do not reflect what you were led to believe in order to get you to sign up, you probably shouldn't sign them. Many people do sign loan documents that amount to shooting themselves in the head financially. Refusing to sign can cost you money, make no mistake. But agreeing to bad loans will usually cost you more. Nor are you legally committed to that lender until, well, at least after you sign the note, and not completely until the loan is funded and recorded.



It is comparatively rare that you should sign loan papers if the loan you are agreeing to is not what you were lead to expect. There is no "Get Out of Contracts Free" card in the real world, and once that loan is funded, you are bound to all of the terms of the contract, and this includes not only high potential costs and rates, but prepayment penalties and everything else.



With that said, I should talk about one reasonably common exception: Purchase money loans. The escrow period in purchases runs only so many days, and you have to have everything done during that period, or the deposit you made to hold the property is at risk. It's still usually a good idea to negotiate an extension on your purchase escrow rather than agree to a bad loan or even a less good loan, but there are cases where it can be smarter to sign the loan documents now and refinance later.



Now, for refinancing your primary residence, just because you sign documents does not mean you are stuck. There is a federally mandated three day right of rescission when you refinance your primary residence. It's not a good idea to sign just because you can rescind later; that three days is gone before most people are realize it. The rescission period is a last chance to avoid disaster, and signing loan documents can commit you to paying certain costs and fees even if you later rescind. Better not to sign in the first place if you find a problem, and you should always look for problems before you sign.



Just because you signed and the loan funded does not commit you to it for ever and ever. You are always legally free to refinance or sell. There may be prepayment penalties, and you won't get the costs you paid to get the loan you are replacing loan back, but if you're at nine percent interest rate and you can have six on terms as good or better, it's likely to be worth going through the paperwork and paying any prepayment penalty. The math may say otherwise in specific cases, but that is once again a matter of specific situation versus broad rule. Prepayment penalties don't mean you cannot refinance, they only raise the opportunity costs of doing so. Lenders put them into contracts because they not only raise that opportunity cost, they also provide a good boost to their profit if you do jump over that raised bar.



So you can change lenders at any time. There may be reasons not to do so, but that doesn't mean you cannot do it. In every situation, the answer as to whether you should is in your contract and in the math, and it may take a good amount of informed professional judgment to help you make the choice, but that choice is always yours.



Caveat Emptor

 



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