Backup Lenders - Acceptable or considered distasteful?

[Alexander V.]

I recently had a nasty lender experience. I had been pre-approved for a loan, everything was golden, I'm a low risk loan and had low DTI. Nothing changed since being approved and going through the entire loan process, yet 1 day before closing the lender called me claiming that they ran the numbers through their underwriting system again and it suddenly said I was no longer qualified for the loan. They claimed that they couldn't tell me what changed or why I was no longer approved, but--guess what comes next!--accepting a higher interest rate should fix it. This was the second curve ball that they'd thrown me, one in the middle of the transaction and this one is at the very end of the process. If I had any other option, I would have told them they'd lost my business, but I had no other options (and they probably assumed as much).

So for future reference, is it legal/fair to get pre-approved by 2-3 different lenders and go through the loan process with each lender so that if your primary lender does something shady or incompetent at the last minute you've got other options on standby and can quickly switch? Switching at the last minute without having a backup that has already been working through the process in parallel could take weeks and the deal could fall through, but having two or three lenders who are all planning on giving you the loan and have been going through the entire process would make it a non-issue.

The way this experience worked out, I had to take the higher interest rate just to avoid losing the deal. This amounted to me having to pay an additional $100 per month in P&I for the entire duration that I hold this property just because the lender "accidentally" realized this was the "only way" at the very last minute when I was in a corner and no longer had time to seek other lenders. The deal was still good, but this scheme was no minor error--it cut my cashflow by about 25%. I'd like to protect myself against this sort of nonsense on future purchases.

[Elise Marquette]

What were the details of charging the higher rate? Were they financing in PMI or any closing costs or anything like that? It's not legal to randomly decide to charge someone a higher interest rate. It definitely sounds like someone messed up big and if it's a DTI issue, I don't really see how charging you a higher rate (thereby raising your monthly payment) would solve the issue. Without knowing more about the exact situation it's tough to tell.

Was this a Conventional loan? Lenders cannot and do not make more money by charging a higher interest rate. Lenders are paid a commission off the loan amount. 

Of course when you're initially getting approved, it's generally advisable to shop to make sure you're getting the best deal. But once you go under contract, your best bet is to stick with one lender. If things go south, a new lender will have to start the whole process from the beginning again anyway, so it often does not save a whole lot of time anyway.

Like Jonathan mentioned, there is the appraisal and title company issue. Not only that, but no lender will want to waste their time to underwrite your entire file and put their team through hoops to make sure you close on time when they could be working on other files, only to have you leave at the last minute. In any case, when lenders do credit verifications, they will see any and all inquiries on the credit report and you're legally required to disclose whether or not you opened up a new tradeline for any inquiry so everyone will know.