Finding a mortgage lender is a bit like finding the right person to marry. After all, a home loan is probably the largest and longest loan you’ll ever take out. You could be in a “relationship” with your lender for up to 30 years.
But what if things change and you slowly fall “out of love” with your mortgage lender? Can you move your mortgage to another bank, credit union or lender?
The short answer is no. That’s why it’s important to find the right lender from the beginning of your mortgage search. But the longer answer is a little more nuanced.
Mortgage Lender vs. Loan Servicer
From applying for your mortgage to making your monthly mortgage payments, it’s important to understand the role mortgage lenders play in the home buying process.
When you get your mortgage, you get it through a mortgage lender, like a bank, a credit union or an online lender, and you go through a fairly standard process.
- Preapproval: The lender reviews your mortgage application and gives you a letter that spells out how much they’re willing to lend you and what terms they will offer on your mortgage.
- Underwriting: Once you and the seller agree on the purchase price, your loan application goes through additional review by the lender.
- Closing: Your lender has approved your loan and you meet with the seller to sign the necessary documents and pay your closing costs (which can equal between 2% – 6% of the loan’s value) to make the home sale final.
After closing on the house, you’ll spend the next 10 – 30 years paying off your mortgage. During that time, your loan will need to be serviced, which means that your lender or another loan service provider will need to:
- Collect your payments and track your mortgage balance
- Report your payments to the right credit bureaus
- Transfer your mortgage principal and interest to whoever owns your mortgage
- Pay your mortgage insurance and homeowners insurance carriers
- Ensure that the money to cover your property taxes are transferred to your escrow account and then paid to your local town, county, city or state government agency
- In some cases, send homeowner association (HOA) fees to your HOA or property management company
- Work with you if you can’t make your payments
While some larger-sized lenders have their own loan servicing companies, many simply don’t have the bandwidth. Instead, smaller lenders will transfer your loan to a third-party loan servicing company.
Your loan can be transferred from one loan servicer to another at any time over the life of your loan. The good news is that they can’t change the terms of your loan, and they have to give you 15 days’ notice before switching you to a new servicer.
So, when you think about moving your mortgage, it’s important to make the distinction between your mortgage lender and your mortgage servicer.
If your issue is with the terms of your loan, you can’t move to another lender without refinancing (we’ll go into that later).
If your issue is with your customer service, and the lender doesn’t service their loans, you won’t be able to ask your lender to switch you to a different loan servicing company.
In both cases, you can’t move your mortgage, you can only start over with a new loan.
Switching Lenders Before You Buy
Once you close on your loan, your mortgage can be sold and your loan servicing can be transferred without you having much say in the matter.
However, there is one point in the borrowing process when you can move your mortgage. That window of opportunity comes before you close.
Reasons to switch lenders
Let’s say you get preapproved by a mortgage lender, but you don’t like the lender’s customer service or you get a better offer from another lender.
Or maybe your credit score dropped below 600 and your lender decides to raise your interest rate, or worse, deny your mortgage application. You may be able to find another lender who’s willing to approve you for a Federal Housing Administration (FHA) loan, which has a lower credit score requirement, and your mortgage could become more affordable.
Finding the right time to switch
Whatever your reason, if you want or need to switch lenders, do it before you buy the home. Ideally, it should be as early as possible. You may even be able to switch even after the loan has gone to underwriting.
But keep in mind that changing lenders comes with a few headaches.
- If you switch lenders during the home buying process, you may delay the closing, which may not win you the love of your real estate agent or the seller, and could cause the sale to fall through.
- You may need to have another hard credit check performed when you switch lenders, which may hurt (think: lower) your credit score.
- A new lender may request a new appraisal of the home. Besides the cost, a new appraisal puts you at risk of having the home valued lower or higher, which might involve renegotiating with the seller.
Don’t make the switch unless the other lender has reviewed your financial info and has preapproved you. Otherwise, you may end up losing both lenders, and you may have to withdraw your offer on the house.
Switching After You Buy
Once you’ve closed on your loan and started paying your mortgage, you’ve pretty much surrendered your window of opportunity to switch lenders.
At this point, the only real option you have is to refinance your mortgage or, if you’re 62 years old or older, apply for a reverse mortgage.
Refinancing your mortgage
When you refinance your mortgage, you’re taking out a new loan that replaces your original loan. And the new loan can come with lots of new benefits:
- A new lender: When you refinance, you’ll want to look for a new lender who can offer better terms on your mortgage. A commercial bank or credit union may offer better customer service, and an online lender may be able to offer more competitive interest rates or lower fees.
- Lower your interest rate: Reducing your interest rate by 0.5% or more can lower your monthly payments by hundreds of dollars.
- Shorten your mortgage loan term: Refinancing to a shorter-term mortgage can help you save thousands of dollars in interest over the life of your loan and help you own your home sooner.
- Get rid of mortgage insurance: If you were paying private mortgage insurance (PMI) on your original loan, refinancing may remove PMI.
- Take cash out of your mortgage: If you have enough equity in your home (the difference between the current value of your home and what you still owe), you may be able to borrow more than you currently owe and pocket the difference as a low-interest loan.
- Switch from an FHA loan to a conventional loan: If your original mortgage was an FHA loan, you may find that you’ll get a better interest rate and pay less in mortgage insurance premiums (MIPs) if you can refinance to a conventional loan.
Besides being able to switch lenders, there are many reasons why taking advantage of a refinance might be worthwhile.
Applying for a refinance works just like applying for a mortgage. You’ll go through the same mortgage-qualifying process you went through when you first bought the home. Because you don’t have to get your refinance through the lender who approved you for your original loan, refinancing can become another opportunity to switch your lender.
But this isn’t always a foolproof plan.
Because of all the moving and selling in the mortgage industry, you may wind up with the same servicer you started with.
What To Do When You Can’t Move Your Mortgage
Once a lender starts servicing your mortgage, there is no “easy” way to move your loan to another lender. That’s why it’s important to find the right mortgage lender from the start. You can also try and learn which loan servicers your lender works with before you commit to a mortgage offer.
Otherwise, refinancing, which comes with many benefits – like lowering your interest rate, shortening your mortgage term and getting rid of mortgage insurance – may be your best option.