We Americans are so busy these days we usually prefer a simplified version of everything: We’d rather text than call, and we’d rather buy Christmas gifts online than go to the mall.
Because I’m a real estate broker, you may expect me to say online lenders are horrible and that everyone should go to personal mortgage brokers for the service. The truth is, it depends.
Just as some people prefer a high rise condo in the city and others prefer a single family with acreage in the country, there is no one right answer. Let’s take an unbiased look at the details, benefits and disadvantages of online lenders.
(Full disclosure, some online lenders I mention are advertisers on Money Under 30.)
Online lenders — less time-consuming and sometimes cheaper
Generally speaking, the home loan application process through online lenders is a bit “dumbed-down” compared to going to a large financial institution or meeting one-on-one with a mortgage broker. That’s one of the main reasons they are so popular; who does’t want to apply for a mortgage while watching TV and eating dinner at the same time?
With an online lender, there is no need to have time-consuming in-person meetings, which can save time.
Online lenders tend to undercut traditional mortgage brokers on rates and fees, too. Due to the tough competition for online lending, these lenders realize the best way to grab more customers is by offering the lowest interest rates and most flexible payment terms out there. They also have low closing costs because they don’t have to pay for the same type of expenses (offices, etc.) as mortgage brokers do.
If your credit score is lower than 700, it’s another reason you may want to try applying for a loan with an online lender. They don’t always use the same underwriting investors as the big banks do, so you may be able to qualify for a loan even if you were rejected by a local bank.
The “cons” of online mortgage lenders
As you might expect, there is an increased risk of fraud, scams and illegal business practices with online mortgage lending. You have to know who you’re dealing with.
You should never need to pay money for a pre-approval or quote. Many lenders charge an application fee that covers your appraisal, credit check, and other expenses, but you should not need to pay this fee until later in the application process.
It’s also quite common (though illegal) for online lenders to advertise very low rates in order to entice you to fill out an application. Once they get your whole application, run your credit and get the process started, they’ll tell you that introductory rate is no longer available. There’s little you can do to avoid this, except to keep your options open and pay close attention to every step of the process.
Although online lenders tend to approve applicants with lower credit scores that mortgage brokers will turn down, the interest rates tend to be extremely high for borrowers with poor credit. Just because you can get approved for a mortgage doesn’t mean you can afford to buy a home. If you have a low enough credit score that you’ll pay a higher mortgage interest rate, it’s a better idea to continue to rent as you pay off debt, build your savings, and repair your credit rather than buy a home at an above-market rate.
Tread lightly with online forms
If you use an online mortgage lender, be careful with the online forms as well. Since there is no one there to answer your questions (except maybe a 1-800 number with limited hours), it can be easy to misunderstand the questions on the loan application. If you misinterpret the questions or click “enter” and move on to the next page without reading the fine print, it could result in higher fees or a problem with your approval later down the line. And if you’re doing a home purchase, you need good communication from your lender once you’re in escrow.
If you have an issue with the appraisal or the loan funding and the call center is closed for the weekend or holiday, it might kill the whole deal. Therefore, ask plenty of questions about the lender’s availability and response time. After all, what is the point of going to an online lender who offers lower closing costs than your mortgage broker would if they cause you to fall out of escrow and lose your earnest money.
Mortgage brokers — trust and reliability
Whereas tailored advice hand-holding may be online lenders’ weakness, it’s the greatest strength of local mortgage brokers.
Mortgage brokers want to win your business and they know one of the best ways to do that is by offering superior customer service. A good mortgage broker, just like a good real estate broker, creates a relationship of trust and reliability. They will hold your hand through the process, help prevent you from making major mistakes and answer all of your questions.
“Borrowers often choose mortgage lenders based on referrals by real estate agents or builders, driven in many cases by personal relationships with local loan officers” says John Robbins, CEO of Bexil American Mortgage, in an article from Bloomberg Business. Many home buyers find the face-to-face relationship with their lender to be imperative in the already-stressful process of buying a home.
Though interest rates and fees may be lower with online lenders (think less overhead), it isn’t always the case. A mortgage broker can shop around to a variety of different lenders, loan programs and underlying investors to find the loan that best suits your needs. They may even end up saving you money.
We recommend you consider both online mortgage lenders and a local broker — perhaps getting mortgage pre-approval from both — before committing to a lender. With online lenders, think convenience and competitive rates. Look to local brokers and banks for personal, face-to-face service.
Which method did you choose to go for your recent purchase or refinance? Was your experience excellent or a disaster? Let us know in the comments.