We are often asked at Solutions whether it makes more sense to go with a local lender in the Charlottesville area that knows the local market and is available to answer calls beyond regular office hours, or go with an online mortgage lender.
We see the commercials all the time about being approved in eight minutes by uploading your W2s and other tax info from your phone, thus beating out other potential home buyers vying for the same property who have to wait for their lender to answer the phone.
When you are in a low-inventory situation, as we have here in the Charlottesville area, having such rapid response times might be a valuable asset to have on your side.
Online mortgage lenders such as LendingTree, Consumer Direct, Loan Depot and Quicken Loan’s Rocket Mortgage allow home buyers to complete the entire mortgage application on their laptop or phone, rather than heading to a bank or lender to submit all that paperwork in person.
Such mortgages are growing in popularity, particularly for younger home buyers: One recent survey by NerdWallet found that a full 64% of millennial mortgage applicants would prefer to get it all done digitally.
While it’s hard to beat online mortgages in terms of convenience, home buyers should know that there are both advantages and disadvantages to financing a home purchase in this manner.
Here are the pros and cons—and how to decide whether an online mortgage lender is right for you.
Pro: It’s easier to comparison shop
Comparison shopping is far easier to do online versus trekking from local lender office to local lender office — and this is certainly true with mortgages, too.
When looking for the best mortgage, Solutions recommends checking out the rates from at least three lenders. You’ll want to get a good-faith estimate that breaks down the mortgage’s terms, including the interest rate and fees, in order to make an apples-to-apples comparison for the best deal.
Pro: Online lenders often offer lower rates and fees
Because online mortgage lenders don’t have the kind of overhead costs that brick-and-mortar banks do, a lot of them pass a portion of the savings onto their customers in the form of lower mortgage rates and/or lower fees. Even a slightly lower interest rate can save you a lot of money over the long haul.
Find a lender who can offer competitive mortgage rates and help you with pre-approval.
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For example, a 30-year, fixed-rate loan for $100,000 at 5% requires $93,256 in interest payments, whereas an interest rate of 4.5% requires $82,407 in interest payments — and that’s a savings of $10,849 over the life of the loan.
Pro: You can get an online mortgage fast
If you need a loan quickly, an online lender can deliver. Quicken Loan’s Rocket Mortgage, for instance, boasts that it can whiz you through the application process in eight minutes. This speed is made possible thanks to the many digital tools that help expedite the loan application process.
For instance, Rocket Mortgage’s mobile app lets customers quickly scan their driver’s license and W-2 from their phone, rather than needing to submit such documentation in person.
Con: There’s less personalized customer service
No matter how you spin it, using an online mortgage lender just doesn’t provide the same kind of one-on-one service you get when you work with a local mortgage lender. For a number of home buyers, that kind of face-to-face customer service is invaluable.
Many online mortgage lenders do employ loan officers you can speak to on the phone, but they are often reachable only during business hours or may not be available when you call. By comparison, local loan officers at brick-and-mortar banks may be available during nights and weekends, which can be helpful if you need your lender to draft a pre-approval letter on short notice. But this varies, so be sure to check your lender’s hours of availability so you can plan accordingly.
Con: Online lenders aren’t ideal for complicated home loans
Because most online lenders are national entities, many of them don’t employ mortgage specialists who know the ins and outs of your local market, but they are great for conventional scenarios: salaried borrowers without financial or credit complications, and properties that are typical for the area in design, lot size, condition, and amenities.
This can be a big disadvantage if you’re applying for a complicated loan, such as an FHA loan or a mortgage for a self-employed borrower. These are considered “outside-the-box” loans and you may have more alternatives with a local mortgage broker.
Also, online mortgage lenders aren’t typically as well-versed in local home buyer’s incentive programs that can help drive down the interest rate or reduce closing fees.
Con: Mortgage lending scams are rampant online
The internet is rife with scams and fraudulent business practices of all sorts, and the online mortgage market is no exception. Indeed, many scam artists prey on people shopping for home loans on the internet and, unfortunately, online predatory lenders are good at covering their tracks.
If a home loan offer sounds like it’s too good to be true, it probably is.
Check to see whether an online mortgage lender is registered with the Better Business Bureau before you offer up any personal information whatsoever.
Pro: You can get Pre-approved quickly before you begin your property search
Get pre-approved for an investment property loan before you begin your property search to leverage your bargaining power.
You’ll get a completely online application process with less paperwork, and you can track the status of your mortgage application.
After you close your loan, you can manage your mortgage online without any hidden fees. For example, Quicken services 99% of its mortgages, which means you can expect customer service to continue after you close.
Do I need a real estate agent?
At first, you may be able to convince yourself that you don’t need a real estate agent to buy a home when you are using an online lender. But when you find yourself sifting through papers you don’t understand, you may begin to reconsider.
There are many reasons to hire a real estate agent when house hunting: access to the Multiple Listing Service (MLS) database, an experienced home price negotiator, legal protection, and someone who can fill out all the detailed paperwork for you.
As with any lender, they are required by law to provide you with two documents – the Loan Estimate and the Closing Disclosure – which outline your closing costs and help you avoid surprises at the closing table.
Here at Solutions we are happy to help guide you through the process and decide whether online is right for your needs. We also have access to many local lenders who are on call to help answer any immediate questions you might have.