Two Lenders are Better than One

Why Homebuyers Should Have a Back-up Lender in Place

Two Lenders are Better than One
August 15, 2014

You probably comparison-shop for items such as shoes or computers and prioritize your choices – “I’ll buy the merchandise at vendor X if I cannot get a better deal at vendors Y or Z.” Why wouldn’t you do the same comparison-shopping for mortgage lenders on arguably the largest purchase you will make in your life?

Some homebuyers are content to simply take a realtor’s recommendation, or work with the bank they have been using for their savings and checking accounts. That may be the best choice for you in the end, but it is not guaranteed to be. You owe it to yourself to look around with multiple lenders and/or mortgage brokers, find the best rates and terms for you, and choose at least two to proceed through the pre-approval process.

If you go far enough in the process, you will need to pay for two appraisals, but for many people this is worth the security of having a back-up lender. If your credit is so fragile that engaging a second lender pushes you over the edge, perhaps you should not be buying a house.

Why should you have a backup lender? Because things can easily go wrong with the primary lender through the closing process, and if you have identified a backup lender, it is easy for you to pick up the pieces with a new lender and move relatively quickly.

When engaging multiple lenders, it is important to be upfront with all parties. Let them know that you are in the comparison-shopping stage.

Once you make a decision on a lender, let the backup lender know why you are proceeding with another institution, and that should an issue arise with the primary lender, that you are still interested in their business. Whether it is an issue with price, service, or terms, it gives the alternate vendor valuable feedback. Make your decision as early as possible in the process so you do not waste the second vendor’s time.

While it is good to have a backup lender, there are a few things you need to consider as you do so.

Once you agree to lock the rate, stick with the lender/broker that you have locked the rate with unless the deal falls through from the lender side (claiming invalid approvals or rate locks) or the lender/broker engages in unethical activity. This is especially true if you are going through brokers – you run into the embarrassing possibility that both brokers are locking you in with the same lender, which will not be well received by anybody.

A lock is a two-way street – you know how you would feel if you arrived at closing only to discover they have decided to charge a higher rate after all. You should show your lender the same level of commitment.

For FHA loans, you can only engage lenders one at a time because the case number cannot be assigned to two different lenders. The first one has to give up the rights to it.

You are well within your rights to comparison shop for mortgages and engage multiple lenders – just act ethically, and with consideration for others, as you do so. The “Golden Rule” still apples here – do not treat any lender in a way that you would not want to be treated. Follow that simple tenet, and things should work out fairly for everyone involved.


Photo ©iStock.com/monkeybusinessimages

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