The Backup Plan
When you applied to college, you probably didn’t apply to only your top choice. You likely applied to two or three “safety schools” just in case you didn’t get in. Having a backup plan in place would protect you from the disillusion of not having a plan following graduation, right?
It’s smart to employ the same idea when applying for a mortgage.
Let’s say you’ve found the perfect home, and you’re chomping at the bit to secure financing. But what happens if the only mortgage application you submit falls through? The recession has landed some hopeful homeowners in a tough spot – they’ve regained a steady income, but a foreclosure has tarnished their once-perfect credit. Lenders have tightened their standards since the financial crisis, and many folks are finding themselves unable to qualify.
This is a situation where it might be smart to double-app,” or apply for more than one mortgage. Why? Even if you have perfect credit, nothing is absolutely certain when it comes to applying for a mortgage. As a borrower, you’re subject to all kinds of shady misrepresentation and misquoting that could leave you feeling deceived and cheated when you go to sign the final documents. If you only have one loan ready to go and it doesn’t align with the terms that enticed you to sign up, your options are limited to:
1) Reluctantly sign on the dotted line and pay a different rate, higher closing costs, a pre-payment penalty, or all of the above.
2) Don’t take the loan and risk losing the substantial amount of money you’ve already spent to secure your dream home.
However, if you have a backup loan waiting for your signature, you can cut ties with the dishonest lender and save the transaction from falling through.
It’s important to be strategic about how you apply for a backup loan. If you explicitly state that you’ve already signed up with another lender and are just looking for a backup in case your first choice can’t deliver, it’s unlikely a loan officer will oblige your request. After all, who would agree to spend hundreds of dollars and a lot of time pushing your loan through with no prospect of getting paid?
When shopping for a backup loan, the smartest way to go about it is by giving the lender a real chance at winning your business. Approach them before you’ve signed on with anyone else, yet be honest that you’re submitting multiple mortgage applications. After all, the backup lender is going to find out you’re “double-apping” once they run your credit and see the first application on your credit report. It’s best to be straightforward about your intentions and keep all parties in the loop.
Buying a home is one of the largest transactions you’ll make in your lifetime. And, if the situation calls for it, signing up for a backup loan is the cheapest, smartest thing you can do to protect yourself.