You've found a home you like, you're working with a great, but you feel nervous. You like the house you're buying, but it's not your dream home. You wonder if you've made a terrible mistake. What are your options? Can you back out of a mortgage before you close on it?
The short answer: Yes, but it will cost you.
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.
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 $250 to $475, with a national average of $340. A title search can run from $300 to $600. 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.
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.
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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