Not that long ago, getting an online mortgage was a Digital Age novelty – akin to paying for groceries via smartphone.
Today, online lenders such as Quicken Loans are established industry players that issue a greater and greater share of loans to U.S. homebuyers.
In the wake of the economic downturn of 2008 and the stricter financial regulations that followed, many big banks began shedding their low-margin, high-risk mortgage divisions, leaving small banks, credit unions and (more lightly regulated) online lenders to fill in the gap.
Since 2007, the percentage of residential mortgages issued by banks has plummeted from 74% to 52%, and is likely to fall further.
To a large extent, therefore, online lenders are winning because big banks are quitting the game. But does this trend represent a “win” for borrowers?
What are the benefits and drawbacks of getting a mortgage from an online lender?
The Pros of Online Mortgages
If you’ve seen ads for online mortgage lenders, then you’re already aware of their biggest competitive advantage over “brick and mortar” banks: lower interest rates.
Because online lenders don’t have physical branches to staff and maintain, they have lower operating costs, which allows them to offer lower interest rates and fees to borrowers. Over the life of a mortgage, this could save you thousands of dollars in interest and closing costs.
Faster Application Processing.
At the average bank or credit union, the loan officer hands you a thick stack of mortgage application forms to fill out.
Also, the completed forms must be accompanied by a variety of tax forms, bank statements and other financial documents – documents you must track down, photocopy and fax (or hand deliver) to the bank.
By contrast, online lenders have you fill out all the forms online, and the attachments can be uploaded with the digital application. Between this and the fact that there’s no need to schedule in-person appointments with a loan officer, the amount of time saved can be huge.
Higher Odds of Approval.
When it comes to getting a loan approved, the #1 deciding factor is your credit score. And here’s where online lenders have another advantage.
Banks and other traditional lenders are often required to reject applicants whose credit scores fall below a certain threshold, but online lenders have more “wiggle room.” They are more likely to approve mortgages for home buyers with less-then-stellar credit scores (though such borrowers may have to accept higher rates and penalties in exchange).
The Cons of Online Mortgages
Lower Overhead Can Mean Less Customer Service.
Although many digital lenders boast about being open 24/7 and letting customers interact with customer service reps by phone and email, it may sometimes be hard to get hold of a helpful human when you need one.
And while it may be more convenient to fill out applications in the comfort of your home, it’s also easier to misinterpret the forms and make mistakes when nobody’s walking you through the process and answering questions right away.
Even a small error on a form could spell the difference between approval and rejection.
So before choosing a particular lender, scan the company’s website to learn about its customer service procedures and protocols. You may also want to check out what previous customers have said about their customer service at sites such as Yelp.
The speed and convenience that comes with applying online could be offset if getting answers to your questions takes hours … or even days.
Interest Rates Can Change.
Interest rates can change literally overnight, so there’s no guarantee that the rate you saw advertised yesterday will be the rate available today. In fact, if your credit score is underwhelming, you may not even qualify for today’s low rate.
If getting the lowest possible rate is your main goal, don’t be afraid to walk away if the rate you’re actually offered doesn’t meet expectations. In other words, don’t let inertia guide your thinking: “Oh well. I’ve come this far in the process. May as well see it through.”
Beware of Scams.
Anyone over the age of six months knows that the internet is home to plenty of bargains, as well as cyber-thieves. To protect yourself against lending scams, follow the rule of thumb that says, “If a deal seems too good to be true, it probably is.”
If a lender pulls a “bait and switch” (offering an incredibly low rate and then saying that you don’t qualify for it), the operation may be scam. The most obvious scams are those that require an upfront prepayment for quotes or preapprovals. Check with the Better Business Bureau to separate legitimate lenders from the “boiler room” operations.
The most obvious scams are those that require an upfront prepayment for quotes or preapprovals. Check with the Better Business Bureau to separate legitimate lenders from the “boiler room” operations.
How Much Hand-Holding Do You Need?
Ultimately, deciding whether to use an online lender or a traditional bank depends on what level of customer service you need – or expect – and how knowledgeable you are about current interest rates, terms, and the mortgage lending process as a whole.
An experienced homebuyer may be more comfortable working with an online lender because they’ve “been there and done that” before.
On the other hand, first-time buyers might benefit from the expertise and guidance that a loan officer can give them through in-person, one-on-one interactions.