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You've decided it's time to buy a house and you're equal parts nervous and excited. You make an offer, the offer is accepted, your mortgage is in place, and suddenly, you're sure you've done the wrong thing. What do you do? Can you back out of a mortgage before the closing date?
The short answer: Yes, but it will cost you.
You can back out of a mortgage before closing
There are legitimate reasons why you may need to put the brakes on a mortgage before you get to closing.
For example, the home inspection may have revealed serious issues that the seller refuses to address. Maybe there's black mold or a leak in the basement -- problems that will be expensive to mitigate. Perhaps the seller got cold feet and decided to back out of the deal.
If you fail to rate shop before settling on a lender, you might start to worry that you won't be able to afford the monthly mortgage payment. This could lead to a case of borrower's remorse.
No matter why you back away from a mortgage before closing, the lender is likely to charge you for the trouble. While federal law puts limits on how much a mortgage company can charge, there is a lot of wiggle room when it comes to added fees.
How much will canceling a mortgage cost?
Typically, the amount of money you'll pay to cancel a mortgage depends on how far along you are in the loan process. Say you agree to a mortgage only to learn the next day that your company is closing. It is possible that your lender will let you walk away with no penalty. However, if the lender has put several weeks of work into the mortgage, they are likely to expect to be paid.
For example, if a home appraisal has been conducted or title work has begun, the fees paid for those services are non-refundable. In addition, some lenders charge a loan origination fee to cover time spent on paperwork, while others charge a rate-lock fee.
To give you an idea of how much fees can add up before closing, the appraisal on a single-family home can range from $313 to $420, according to HomeAdvisor. A title search can run from $150 to $500. If your lender charges an origination or processing fee, it will typically be between $300 and $1,500.
According to Mark Bradford, a loan officer with James B. Nutter in Kansas City, Missouri, his company cannot collect money from a borrower until the borrower has had an opportunity to read and sign a loan estimate. The loan estimate combines the traditional Good Faith Estimate and Truth-in-Lending (TIL) statements. The document is designed in an easy-to-understand way that clearly outlines all charges, including how much you can expect to pay if you back out of the mortgage. That is because you can see all closing costs, including those that are due up front.
Each lender has a slightly different menu of costs, and it is essential to understand which services your lender does (and does not) include. If you have any questions, ask before signing the loan estimate.
Tips to avoid losing money on a canceled mortgage
There are things you can do throughout the mortgage process to help ensure that you won't be a victim of lost money due to a canceled mortgage.
- Lead with your head and not your heart. No matter how excited you are about a specific home, figure out if you can afford it without stressing over the debt. Factor in all costs, including taxes, insurance, utilities, and upkeep before you decide to apply for a mortgage. Taking out a mortgage is a lot like getting married: You can back out until the last minute. And while you may lose something, it's better than going through with an action that will be wrong for you. Although the Truth in Lending Act (TILA) requires a three-day "cooling-off" period for borrowers who regret closing on a home equity loan or refinancing their mortgage, there's no mandatory cooling-off period for new mortgages.
- As soon as you recognize a problem, let your lender know. The less work the lender puts into the loan, the less a cancellation should cost you.
- Opt for a closing date 30 to 45 days out. Mark Bradford explains why: "We normally advise buyers to have a property inspected before they have it appraised. That way, if the inspector finds anything wrong with the house, the buyer can renegotiate the deal or walk away entirely. Having the inspection done first means the buyer does not need to pay for an appraisal until they know they want the house and won't lose that money if they back out." While a home inspection costs an average of $279 to $399, it can save thousands of dollars in repairs, and in this case, prevent an unnecessary appraisal.
The trick to buying a home starts with knowing how much house you can afford. From there, don't offer more than you've budgeted, and make sure to choose a mortgage lender with terms that benefit you. Don't let your excitement override your good sense.
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Dana George has a BA in Management and Organization Development from Spring Arbor University. For more than 25 years, she has written and reported on business and finance, and she's still passionate about her work. Dana and her husband recently moved to Champaign, Illinois, home of the Fighting Illini. And though she finds the color orange unflattering on most people, she thinks they'll enjoy Champaign tremendously.
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