Can You Back Out of a Refinance During Underwriting?

It might seem like a good idea to refinance your mortgage when interest rates go down or when your finances change. But what if you change your mind after starting the process? Is it possible to back out of a refinance during underwriting?

In short, you can back out of a refinance at any time before the closing. But it can be harder to back out once underwriting has started than it is to just walk away. Find out what you need to know to back out of a mortgage refinance while it’s being approved.

What Is Underwriting for a Refinance?

The lender has to agree to give you the new loan when you apply to refinance your mortgage. This approval process is known as underwriting.

The underwriter will check the information on your loan application and look at your finances to see if you can get a mortgage refinance. They will look at factors like your:

• Income and employment
• Assets and reserves
• Credit history and scores
• Debt-to-income ratio
• Appraised home value

The underwriter will issue loan conditions if they need more documentation to approve your application. You may have to provide pay stubs bank statements tax returns, and other financial records.

Underwriting can take anywhere from a few days to a few weeks depending on your situation. The lender can’t close on your refinance until the underwriter approves your loan.

Can You Cancel a Refinance After Underwriting Starts?

Yes, you can back out of a refinance at any time before closing, even if underwriting is already underway. However, it’s best to cancel as early in the process as possible.

Here’s what to expect if you decide to withdraw a refinance application during underwriting:

Inform Your Loan Officer

Let your loan officer know you’ve changed your mind and want to cancel the refinance. They will notify the underwriter. You will likely have to submit your request to cancel in writing.

Pay for Appraisal and Other Costs

While lenders can’t charge you just for applying, you will have to pay any out-of-pocket costs incurred during underwriting. This often includes the appraisal fee.

Wait for Documents

The lender will mail or email you documents to sign confirming the canceled refinance. This formalizes the process and releases you and the lender from moving forward.

Your Credit May Take a Hit

The lender will likely run your credit when you apply. Having this inquiry without getting the new loan may cause a small, temporary drop in your credit scores.

Loss of Locked Interest Rate

If you locked your interest rate, backing out could cost you the rate lock deposit you paid upfront. This is usually 0.5% to 1% of the loan amount.

Delay Future Loan Applications

Canceling after underwriting has started creates extra work for lenders. Other lenders may make you wait 30-60 days before applying again as a result.

So while you can technically back out at any point, it becomes more difficult and potentially costly the further along you are.

Alternatives to Canceling a Refinance

Instead of withdrawing your application, you may want to consider these options:

• Ask for an extension of the rate lock period if you are concerned about delays.

• Modify the loan amount or terms if they no longer fit your needs.

• Switch lenders if you are unhappy with poor communication or customer service.

• Pause or slow down the process if you just need more time to make a decision.

As long as you have not signed final closing documents, you retain the option to cancel. Think carefully before exercising that option if underwriting is already in progress.

Reasons to Back Out of a Refinance

Why might you decide to withdraw a mortgage refinance application during underwriting? Here are some common reasons:

• You no longer need to lower your monthly payment.
• Refinancing costs turned out to be higher than expected.
• You are anxious about the underwriting process or paperwork.
• Interest rates dropped so you can get a better deal.
• You are buying another home or moving sooner than anticipated.
• Your financial situation changed, affecting eligibility.
• You are unsatisfied with the lender’s service and responsiveness.
• The value of your home appraisal came in lower than expected.

If you’ve had a change of heart for any reason, don’t feel obligated to continue with a refinance you no longer want or that no longer makes financial sense. Just be aware of the implications of canceling once underwriting is underway.

When Is Backing Out Not an Option?

In most cases, you can withdraw a refinance application at any time before closing. But there are some situations where you may no longer be able to easily cancel:

• You already signed your loan documents. After signing, you enter a period where you can still back out but will forfeit fees and deposits.

• You took cash out with the refinance. If you’ve already received money from the loan, you cannot simply change your mind.

• You committed mortgage fraud. Lying or falsifying documents makes the loan void. You can’t back out of legal consequences.

• You have a broker agreement. Brokers may bind you to completing the refinance or charge fees based on the agreement terms.

Outside of situations like these, lenders want to avoid borrowers getting cold feet and backing out. But legally you should be able to cancel a refinance prior to closing, even once underwriting is in motion.

The Bottom Line

It is possible to back out of a mortgage refinance while it is in underwriting. But doing so gets more difficult and potentially costly at that stage compared to earlier in the process.

Before canceling a refinance after underwriting begins, be sure to check the terms of any broker agreement, ask about fees for services rendered, and find out the impact on your interest rate lock and credit scores.

While you can withdraw your application, carefully weigh all options before doing so. You may be able to modify the loan or switch lenders instead if the reason is dissatisfaction with your current lender. If you must cancel, act sooner rather than later.