Applying for a mortgage, and closing one, can be a tedious process. Lenders must scan your credit reports and study your credit score. You’ll have to provide copies of such documents as your most recent pay stubs, bank statements and tax returns to verify your income. And the odds are high that you’ll have to either meet in person or have several telephone calls or online chats with a mortgage loan officer.
But what if you could handle most of your purchase mortgage or refinance online? Could that speed up the process? And if it does, are there any potential pitfalls to applying for a mortgage online?
Not surprisingly, this is a bit of a complicated process. There are plenty of mortgage lenders that now offer what they call digital or online mortgages. But the truth is, most people who apply for online mortgages will often have to speak to a loan officer and will usually need to receive physical copies of their mortgage documents and sign these papers during a traditional mortgage closing, usually at a title company’s office.
An online mortgage might not work, either, if your credit is bad enough so that you’d need to apply for a bad credit mortgage loan or if your income stream is inconsistent. You might have to apply for a mortgage with a loan officer who can take your unusual circumstances into account when determining whether you qualify.
But there is no denying that online tech is gradually streamlining the mortgage process. And while there is still a need for the human element, online lending is easing at least some of the headaches associated with applying for a loan.
A new demand for efficiency
Karl Jacob, chief executive officer of San Francisco-based LoanSnap, an AI-based mortgage technology company, said that the mortgage lending industry has been slow to tap the potential of technology to make the lending process more efficient.
Today, though, customers who are used to online food delivery, ride-sharing apps and Internet banking, are increasingly demanding that lenders automate more of the mortgage process.
"For a long time, the mortgage industry has been viewed as stagnant and full of human error. Homebuyers have associated the mortgage process with stress and frustration," Jacob said. "Online mortgages provide a faster, easier way for consumers to finance a home."
What are some of the efficiencies? Buyers today can often link their bank accounts, retirement accounts and tax information through an online portal so that their lenders can access this information without requiring hard copies of bank statements or tax returns.
Online lenders also allow borrowers to fill out their residential loan applications at their web sites, eliminating the need to mail, drop off or fax this completed form to a physical location.
These changes can save time. Jacob said that it can take traditional mortgages up to 45 days to close. He said that online lenders are working to reduce this time to seven days.
Saving time and money
Tom Furey, co-founder and senior vice president of product development, finance and lending, with Boulder, Colorado-based Neat Capital, said that online mortgages are often less expensive. That's because companies like his -- Neat provides digital mortgages -- use technology to remove the inefficiencies of the traditional mortgage-lending process.
This results in faster closing times and less administrative costs, Furey said.
"The reason most loans take so long is the approval process is manual," Furey said. "Underwriting happens in the background weeks after clients receive a pre-approval."
Neat Capital relies on what Furey calls a digital real-time approval system that asks specific questions of borrowers. Furey says that Neat Capital's application engine might ask how long a borrower will receive income from alimony payments or how long they've earned a certain range of self-employment income.
Borrowers still must prove that they are earning the income they are claiming, of course. But instead of requiring borrowers to find copies of their tax returns or print out copies of their bank account statements, Neat uses linking technology to verify the assets of most of its borrowers automatically, scanning the linked bank accounts and retirement funds of these buyers to determine how much money they have in each of them.
Neat also scans the credit reports of buyers and then groups their accounts by type, showing borrowers how much they owe in mortgages, student loans, vehicle loans and credit cards.
Borrowers who are nervous about linking their accounts have the option of uploading PDF versions of their statements, and Neat will only pull data from linked accounts if their borrowers give their approval.
This linking process, though, does speed the lending process, and spares borrowers from having to make copies of their tax returns, bank statements, retirement fund balances and credit card statements.
Neat Capital, though, doesn't discard traditional loan officers. Furey said that the company does employ these human mortgage experts in case borrowers do have questions and need to speak with a lending professional.
"It's likely the largest purchase a person will ever make, so it's critical they feel supported," Furey said.
Not perfect yet
Josh Goodwin, founder of Tampa, Florida-based Goodwin Mortgage Group, says that while online mortgage lending is convenient and often comes with lower mortgage interest rates and fees, it's not perfect.
The biggest issue? The online mortgage lending experience is designed for the average borrower, Goodwin said, not those with unusual circumstances.
Say you earn a significant chunk of your income from freelance work. You might need to speak with an actual human loan officer so that you can explain why this work, though freelance, is steady, pointing to your long history of contract work as evidence.
The same might be true if you recently suffered a temporary reduction in your annual income. Your application might be flagged if you're relying on online lending. But if you meet with a loan officer in person, you can explain that your income drop was only temporary, and that you have since landed a new, higher-paying job.
Goodwin said that borrowers without perfect credit or with odd income streams might do better to apply for a loan the old-fashioned way, by meeting, or at least speaking by phone, with a mortgage loan officer.
He points to a recent client who first applied for a loan with an online lender. That lender approved the borrower for a loan of just $68,000. When that same borrower came to Goodwin, he was able to approve him for a loan of $280,000.
As Goodwin says, meeting in person with a loan officer can result in a more tailored mortgage-lending experience.
"The whole homebuying process can be a stressful experience for many buyers," Goodwin said. "Having a dedicated loan officer you can speak with about the process can be reassuring."
It’s important, too, for borrowers to determine before they start working with an online lender whether that company is licensed to do business in their state. Borrowers might think that all online lenders can operate in all 50 states. This isn’t necessarily the case.
Neat Capital lists the states in which it can operate on its homepage. The company also contains a link to the NMLS Consumer Access site, a site that lets borrowers search for loan officers and determine where they are licensed to do business. That is important because Neat Capital, despite being an online lender, does assign a loan officer to each mortgage application.
Not fully online
Just because you start a mortgage application online, doesn't mean that you'll never meet in person with lending professionals such as a loan officer or title agent. Consider the closing process. According to the 2018 J.D. Power Primary Mortgage Origination Survey, nearly half of all customers report receiving their closing documents as a hard copy in person, while another third receive them as hard copy through the mail.
John Cabell, director of wealth and lending intelligence with the Troy, Michigan, office of J.D. Power, said that most loan closings still take place in a title company office, in person, with the homebuyers signing the necessary paperwork to complete the mortgage
"Lenders and consumers all have some level of confusion and difference of opinion about exactly what constitutes a 'digital mortgage,'" Cabell said.
Cabell said that the J.D. Power survey found that a third of customers strongly agree that it is still very important to speak with a loan officer, even when taking out an online mortgage. Cabell said, too, that customers cite a higher level of satisfaction when using a mix of personal and self-service.
It might make the most sense, then, for borrowers to work with lenders who allow them to fill out loan applications online and submit loan documents through an online portal but also give them access to experienced loan officers who can help walk them through the lending process.
"The best mix is characterized by having strong human interaction at the advice-oriented beginning of the application process and then using digital channels for transactional activities later, such as when submitting documents," Cabell said.