The number of people searching for mortgages is rising rapidly, and the online mortgage market is thriving because of this new influx of potential homeowners. There are several reasons as to why people are doing that too. Let us take a look.
The Growth of Online Mortgage Lenders
Interestingly, despite the amount of borrowing that takes place online, it is only recently that we have started to see a sharp rise in the number of mortgage lenders.
This is likely because nobody wanted to be the first to take that risk. It is easy to take a risk on a loan worth thousands of dollars, but it is not quite as easy to assume the risk on loans above $300,000. This would hit even the largest of companies if it was not paid back.
When the United States, and the rest of the world for that matter, started to creep out of the last recession, the number of companies offering alternative ways to take out a mortgage skyrocketed. This is, in part, due to people now having a deeper distrust of traditional banks, that and many of the banks were starting to get strict on their mortgage lending so they would not find themselves in financial hot water again—this can be attributed to the Dodd-Frank Act.
Here are some interesting facts about how online mortgages have recently taken off:
- It is estimated that about 8% of all mortgages in the United States are now obtained through online-only lenders—that may not seem like a lot but that is a huge change from a few years ago when it was 0%!
- Around 40% of all mortgage applications are started online.
It is pretty safe to say that we will see continued growth in the application of online mortgages. In fact, online lending for mortgages has become so popular that we are now starting to see major banks offering online lending, although they will not always carry the same benefits as working with alternative lenders. Read more.
Let us take a look at a few of these benefits, shall we?
It Is Easier
Applying for a mortgage through a traditional bank is a hassle. In the past, you would have to go through countless meetings with bank staff and managers. This would mean having to take time off of work. It would mean having to take time out of your day. It was your only way of borrowing cash for a property, but it was still way more hassle than it needed to be…
That is not an issue with online mortgage lending. While they have not eliminated the need for somebody to actually decide whether they can offer you the money or not, there will not be any long and irritating meetings. You can apply online for a mortgage, 24-hours a day, 7-days a week—see similar thoughts from Realtor.com.
In many cases, the details that you need to submit for these loans tend to be a lot less cumbersome than the details that you would need to submit for traditional bank lending too. Again, this contributes to how easy the process is.
It Is Quicker
One of the major advantages of applying for a mortgage online is the fact that it is a lot quicker than heading to the bank. You can thank the various online-only lenders for streamlining the process.
Let us be honest, most people want to move into a new property as quickly as possible. The problem is that applying for mortgages through banks takes a huge amount of time. You will be surprised at how few traditional banks have automated certain processes for applying for loans. A lot of it is still manually done. This means that that it takes around a month to two months to be approved for a loan from a traditional bank. This is just too long for many people. It could cost them their dream home.
Applying for mortgages online is going to be a lot quicker than this. This is because a good chunk of the information gathering process is automated. There will still need to be somebody to sign off on your loan at the end of the day, but they can get to the loan application a lot quicker due to their automation processes. It requires far less filling in forms, and often still has the same number of rigid checks that online loan applications tend to have.
Better for Bad Credit
Now, we are not saying that you can enjoy a mortgage if your credit score is woefully poor. You can’t.
Even online lenders are not going to take the risk on you. However, if you have a middling credit score, you may be approved for an online mortgage when more traditional lenders wouldn’t approve of you. The interest rate may be something to watch out for…But you will stay have the house of your dreams.
As we said, the traditional banks are still reeling from the last recession. Many of them are reducing the number of mortgage products that they offer.
Those that still offer mortgage products tend to be a lot more selective in who they lend. If a traditional bank cannot say with close to 100% certainty that they will get the money back that they lend you, they will not lend to you.
In fact, some people have been turned down for loans because they have a single missed payment from years ago on their credit application. The traditional lenders do not want to lend to anybody that carries even the slightest hint of risk. It’s this fact alone that makes online mortgages popular: they offer just an additional possibility of being a homeowner, and that is huge.
That said, there are other aspects of banking that can generate a lot more money than lending. The legal restrictions on banks have become so tight for mortgages that most simply do not want to jump through the hoops required by the government.
Alternative lenders are less tied by government legislation. Obviously, some will still apply to them, but not the same ones that a traditional bank would be bound by. For many alternative lenders, mortgages are a major business for them.
If they are not lending, then they are not making money. This means that alternative lenders are more likely to take risks on who they lend money to.
A lot of people have found that they can apply and be approved for online mortgages when traditional banks wouldn’t even give them the time of day. Although, you will probably want to bear in mind that if you have a middling credit score, then you will need to pay a little bit more for the mortgage. Even in the world of online lending, it is still going to be the people that have the best credit scores that will get the best deal.
Cheaper Mortgages
In some cases, people have noticed that online lenders tend to be cheaper to borrow from than traditional banks. There are several reasons for this.
- First, the market is a lot more competitive. Due to the ease in searching for mortgage rates online, lenders are putting out the ‘best possible’ price that they can offer on their loans. This is because they want to stand above every other company offering loans. They want you to borrow from them. While mortgage prices are still an issue for traditional banks, they are not as much of an issue. After all, the process is so convoluted that most people are not going to bother looking at more than one or two banks.
- Since these online lenders will not have as much overhead as a traditional bank, they will need to make less money on each mortgage that they offer. This can pull the cost of the loan down. You will be surprised at how cheap things can be when a lender doesn’t have to deal with retail banks or have other aspects of their business that need to be funded e.g. the investment side of things.
- A lot of alternative lenders are also not lenders. They are more brokers. Their job is to find you the best possible deal from the various lenders that they partner with. These brokers still want your business, so they are going to do their best to get a decent deal for you. Often, this deal is going to be a lot better than dealing with a traditional bank.
You still need to remember that mortgage interest rates are going to be based upon the amount of risk you have as a borrower. The better your credit score, the better the interest rate. So, even if you can apply despite having a lower than normal credit score, it is still worth trying to lower your credit score as much as possible before you apply for the mortgage.
| Online Lender | Minimum Credit Score | Down Payment |
| Better.com | 615 | 3% |
| SoFi | 660 | 10% |
| Rocket Mortgage | 620 | 3% |
| Fairway | 620 | 3% |
| Reali | 618 | 5% |
Choice
One of the major advantages of applying for a mortgage online will be the amount of choice you have available to you. We are not just talking about the number of lenders either. We are talking about the products that they offer.
You will often find that online lenders allow a great deal more customization over the mortgages that they offer. This should make it a whole lot easier for you to find a mortgage that suits your needs a bit better. You may not find the ‘perfect’ mortgage, but you will certainly get a lot closer than you would if you worked with a traditional bank.
Flexibility
While this is hopefully not something that will happen to you, there have been cases where people have had to change the terms of their mortgage based upon a change in their financial situation. If you go to a traditional bank, then the bank has a surprising amount of power.
Their terms are strict, and they are probably a lot less likely to budge from the terms that they have. Their mortgages are essentially set in stone, and only the most extreme situations may allow them to change.
This doesn’t happen as much in the world of online borrowing. Many of the major online mortgage lenders have tools in place that will allow you to easily apply for a change in your mortgage terms. There is still no guarantee that they will approve you, but we can guarantee that the chances are higher than that of a traditional bank mortgage.
Conclusion
If you are looking to obtain a mortgage, then look to online lenders. The borrowing process is often a lot simpler, and this can result in better deals and more flexibility over the mortgage offered.