Benefits of Choosing a Mortgage From an Online Lender
Your local bank isn’t your only option anymore when shopping for a mortgage. Online-only lenders such as SoFi, Better, Guaranteed Rate and Rocket Mortgage by Quicken Loans are now competing for borrowers looking for more flexibility in their homebuying journeys.
They join an industry inexorably moving online. Last year, 43% of customers began their mortgage application process online, according to J.D. Power. Even borrowers who complete loan applications in person usually begin their mortgage research on the web. In a study from mortgage tech firm Ellie Mae, 72% of people surveyed used the web to identify their best mortgage rates, while 59% went online to gauge how much they might qualify for.
Traditional banks have been forced to catch up, greatly expanding their online offerings. But do online-only lenders have their own unique benefits? We’ll explore what you might gain by using an online lender for your mortgage and highlight the benefits of shopping around no matter who you choose to borrow from.
The advantages of online lenders: Speed and convenience
Online lenders say their speed, competitive rates, convenience and customer service distinguish them from traditional institutions. These companies enable people to easily browse their product offerings, calculate potential mortgage payments and begin the application process wherever they are, whenever they’re ready. They also advertise competitive rates, made possible by the lack of brick-and-mortar overhead.
To compete with local bank customer service, web-based lenders generally invest in support via online chat, email and phone. But the draw is in how quickly you can apply for a loan online without human interaction.
At Better, for example, you can apply for loans and lock in rates before ever speaking with a loan officer, said Eric Wilson, Better’s co-founder and head of operations. He said the company’s automated application and underwriting processes make applying faster than traditional lenders. In some cases, Better can take customers from the point of receiving a property contract to funding a loan within nine days.
That speed can be an advantage in highly competitive housing markets. Roger Arnemann, 43, and wife, Katherine, used a traditional lender to buy their first home in San Francisco. But when it came time to buy a new home a half-hour outside the city in Kentfield, Calif., Arnemann decided to look at a range of lenders, both online and traditional. He was in regular contact with their loan officer via text throughout the buying experience.
He got quotes from about 10 different companies. Online lender SoFi was one the best rates by about 0.25 percentage points, and was 0.50 percentage points lower than the family’s primary bank, said Arnemann, a chief operating officer at a fintech company.
The experience with SoFi was faster and more convenient, too, he said. SoFi was highly responsive, and he and his wife were preapproved within 24 hours. That was important because they were up against other buyers, and time was of the essence. As the loan application progressed, SoFi’s loan officer stayed in frequent contact by text. “If SoFi couldn’t have moved so fast, we would have lost the house,” Arnemann said.
Online lenders also typically emphasize the ongoing relationship they maintain with their customers after the loan closes.
Some provide homeownership classes or courses. Others have loan officers touch base periodically. Arnemann said he appreciated the ongoing relationship with SoFi, which includes a training program on negotiating higher salaries and regular networking events.
“It is very obvious after the fact that they are trying to make you successful,” he said.
Traditional lenders are catching up
As online lenders become more prominent, traditional lenders are increasingly offering online tools as well. Many traditional lenders have digitized their loan applications and offer online mortgage calculator tools, closing the gap with online companies. This is good news for borrowers since there are more lenders vying for your business.
But the internet also makes it easier for scam companies to emerge, so you’ll want to be especially careful to avoid fraudulent deals online. Michael Day, policy director at the Online Lenders Alliance, said borrowers should be skeptical of any lender that promises instant money or says no credit checks are required. “Basically, anything that sounds too good to be true probably is,” he said.
Once you find a few reputable lenders, don’t forget: One of the most important things you can do as a prospective homebuyer is shop around and compare different offers. In the past, borrowers were nervous about shopping around too much because they worried that multiple credit inquiries would hurt their credit scores. However, as long as the inquiries occur within the 30-day window, lenders won’t penalize you for doing your due diligence.
You’ll also want to look into commitment and closing costs as well. Not all companies charge the same rates or demand the same fees. Some lenders will also lower interest rates and closing costs if you have an existing relationship with them.
For example, SoFi doesn’t charge application, origination or lender fees, but you’d still be responsible for third-party closing costs and expenses for things like flood certification. Dig into who is offering what to ensure you’re getting your best overall deal.
The pros and cons of working with online lenders
- You can search for quotes and apply for loans 24/7.
The biggest advantage in online lending is that it’s easy to gather a lot of quotes quickly, said Casey Fleming, a mortgage advisor at C2 Financial Corporation and author of “The Loan Guide: How to Get the Best Possible Mortgage.” This helps in organizing your potential offers and in comparing products.
It also allows for flexibility in the application process. At a traditional brick-and-mortar bank, it’s easy to get hung up on missing paperwork, and you’re generally only working during business hours. “You need to go in, you need to fill out the application, you need to bring all your paperwork with you. If by chance, you’ve forgotten a portion of it or forgot to bring the right information, the process kind of stops,” Day said. An online lender, he said, lets you fill in more information online and gives you flexibility in how you provide the data they need.
- You might be able to track your loan status in real time.
Karen Kostiw, a real estate agent in New York and New Jersey, said online lenders such as Guaranteed Rate provide increased transparency into the process for both buyers, sellers and real estate agents by keeping everyone on the same page.
She said that as a listing agent, she could see when buyers are interested in a property and monitor the progression of their mortgage application. This allows her to keep her clients up to date more easily, rather than to chase down all that information. She noted that borrowers could often track the status of their applications as well, giving them greater visibility into their status.
- Online lending can expand the pool of eligible borrowers.
Many online lending platforms are exploring the use of alternative data to better assess borrowers’ creditworthiness and risk profiles. Someone with a low credit score might generally be deemed too high-risk for a loan.
However, credit scores don’t tell the whole story. Lenders and their underwriters might be willing to approve a borrower if they can access data about on-time rent payments and records of paying for recurring services such as smartphones and utilities. SoFi, for instance, uses not only FICO scores but details such as cash flow and equity as well.
“It gives the lender additional data points and a more detailed picture of the borrower,” Day said. “It’s all those things that are very readily available, but it wasn’t really factoring into credit scores.”
- You might not get the rate you expect.
Online quotes don’t always align with the actual offers once the full application is submitted.
“The quotes are often not relevant, and the reason is that they’re based on what you think an underwriter is going to see when they take a look at your package,” Fleming said.
When borrowers input data such as credit scores, they’re not looking at the full picture. Borrowers might see a credit score of 740 when they check it via LendingTree or other platforms and assume they’ll qualify for a great rate. But lenders look at credit based on the context of your request. If you apply for a credit card and you have a history of responsibly using credit scores, chances are you’ll qualify for another credit card with a good rate.
But, Fleming said, if you’re applying for a mortgage and never had a mortgage before, you’re going to get a lower score because you have not yet demonstrated your ability to manage mortgage debt. “Your score isn’t always your score,” he said.
- Your real estate agent may want you to work with their preferred local lender.
Real estate agents typically have relationships with certain lenders, and they may prefer you use them. You’re not obligated to use your agent’s preferred contacts, of course. But your agent will be able to provide insights about working with those lenders, which can be useful when you’re deciding which company suits your needs.
However, this isn’t always a good idea. Amanda Rothstein, 34, said she applied for a few different mortgages when she recently purchased a home in Philadelphia. Better ended up giving her, her best rate. “And then my Realtor kind of talked me into using the local lender she usually uses because of some concerns she had about some of the online companies. I went through her lender and at the last minute, he told me he couldn’t do my mortgage.”
Because Rothstein is a full-time nanny for two families and has nontraditional income records, the lender said she would need to find a co-signer or ask her fiance to be on the mortgage as well. Neither option interested her. Rothstein went back to Better and worked with them to buy the house.
“They managed to work with my weird income situation, and everything was painless and simple, and it was really great,” she said.
- You’re unlikely to have a local contact.
For some borrowers, knowing there’s someone whom they can speak with face-to-face, particularly if they hit any snags in the process, may be a deciding factor against online lenders.
“I find that people still have that old-fashioned mentality of, ‘I go to my bank and I talk to that person,’” Kostiw said.
In some situations, it’s easier to work with someone in your area. It’s often simpler to stop by a local office to sign or update paperwork, which can become a concern especially as your closing date approaches.
The bottom line
Whether an online or traditional lender is best for you ultimately comes down to your preferences. Understand what your priorities are and the type of borrowing experience you hope to have. Then you can narrow down the options and find the right company to help you navigate the homebuying process.
If you really value an on-the-ground relationship, online lending probably won’t be for you — especially if you already work with a local lender you trust. But if you don’t mind communicating solely via phone, email and text, shopping around online for the right lender could help you find a better rate than you might have locally.
The key is to explore all of your options and compare the terms to determine who is offering you your best overall deal – and who you feel most confident working with long term.