There are more online lenders today than ever before. As more people get comfortable doing business digitally (that’s a fancy way of saying from your couch), they want the convenience and quickness of online mortgage lenders.
This emphasis on consumer-friendly technology has opened the doors to a growing number of fintech startups that are investing their capital in digital platforms rather than brick-and-mortar locations. The result is more lenders competing for your business, which helps drive down the cost of lending while optimizing performance.
Tips for Comparing Online Lenders
Comparing online lenders is not much different than comparing brick-and-mortar banks or credit unions. Mortgage borrowers shouldchoose a mortgage lenderby examining features that are important to them and then conducting a side-by-side analysis.
For most borrowers,mortgage rates, fees,loan typesand credit score requirements are the most important features to consider. You can start by researching online and reading reviews; however many lenders don’t disclose fees or even interest rates on their websites, so you may have to complete an application or call them to get a rate quote.
Other items you might be able to find on a lender’s website include mortgage discounts, borrower qualifications and any special features that set them apart (such as rate match guarantees or specialized technology that streamlines the application process).
What is the difference between a nonbank lender, an online lender and a traditional bank?
A nonbank lender or an online lender are both terms used to describe financial institutions that offer limited services, such aspersonal loansor mortgages, and typically do not offer deposit services, such as checking orsavings accounts. A traditional bank, in contrast, offers a spectrum of financial products for their customers. Traditional banks also have branch locations where customers can apply for loans in person. Sometimes traditional banks will have mortgage discounts for existing customers.
Because online or nonbank lenders focus on loans, they usually develop high-tech solutions to speed up approval times and streamline application processes, which can save borrowers time and money. Additionally, because they don’t have the overhead expenses of branch locations, they can pass those savings on to customers in the form of lower interest rates.
Nonbank lenders are the largest originators of mortgages today.
How much can I afford?
The first step in the homebuying process is to make a budget. First, consider how much you earn each month and how much you spend (on debt, savings, retirement, college funds, etc.). Most experts recommend spending no more than 30% of your gross monthly income on your mortgage. That should also include taxes, insurance and applicable HOA fees. TheForbes Advisor affordability calculatorwill help you take the guesswork out of how much you should spend on a house.
How much money do I need for a down payment?
The larger the down payment you are able to make, the less you’ll have to finance when youpurchase a home. On a conventional mortgage, making a down payment of at least 20% will prevent you from having to pay for private mortgage insurance. The minimum down payment required varies based on the type of mortgage you obtain. In 2019, the median down payment for first-time buyers was 6%.
What Is an Online Mortgage?
Lenders who operate solely online, and those that focus primarily on mortgages, offer a different experience for borrowers than traditional lenders, like banks, do. Online lenders typically don’t offer services like checking or savings accounts, but because they specialize in loans, they often have speedier approval times and application processes. Because they don’t have branches, they may be able to pass some of that savings on overhead costs on to customers.
That can be a drawback for some customers who may prefer an in-person experience. And in some cases, traditional banks offer discounts for things like mortgages to customers who already have accounts.
How to Choose an Online Mortgage Lender
You should choose an online mortgage lender the same way you’d pick a traditional lender: by shopping around. Studies have shown that borrowers who explore different options before deciding to work with a particular lender get better rates.
You can start with our list of recommendations, above. Be sure to take into account not just theinterest rate or APRoffered by each lender, but also closing costs and other fees. Make sure that you’re comfortable with the online approach: if you have questions during the application process, does the lender have reliable customer service?
How to Apply for a Mortgage Online
Follow these steps to apply for a mortgage:
- Check your credit.Before you even start to research lenders, you should take some time to check your credit score. Be sure everything is accurate, and take the time you need to make your profile as strong as it can be: pay down any debt you can, avoid accessing new forms of credit and so on.
- Estimate how much house you can afford.You might want to use a calculator likethe one here. You may also want to research the differenttypes of mortgages.
- Gather all the paperwork you need.You’ll likely need your tax returns, recent pay stubs or other types of income verification, lists of assets and liabilities, bank statements and any other documents that describe your financial situation.
- Apply for the mortgage.Now it’s time to submit your mortgage application.
Pros and Cons of Online Mortgage Lenders
There are some big advantages to working with online mortgage lenders, which are also sometimes known as “non-bank” lenders. These lenders tend to specialize in one type of lending—either mortgages or personal loans, for example. Because online-only lenders don’t have physical locations, they can often pass the overhead cost savings on to customers.
But there are also some disadvantages to working with an online lender. Notably, because they only operate online, you won’t be able to visit a branch to get help with the application. Also, because of their focus on home loans, online mortgage lenders generally won’t be able to provide relationship discounts like traditional banks and lenders could.
