Curve

Online mortgages vs online business loans: What’s the difference?

Peter Miller
The Mortgage Reports contributor

You can get online loans for more than mortgages

In this article:

  • Online platforms make getting business loans as well as mortgages easier for consumers
  • However, online business loans do not have the same consumer protections as mortgages
  • Private (hard money) mortgages also come with fewer protections. beware!

Online mortgage financing has become fairly common. Just about every lender has an online presence with a website, chatbot and artificial intelligence behind the scenes. As more and more mortgages begin the origination online the public is becoming increasingly comfortable with the process.

Verify your new rate (Sep 16th, 2019)

Online mortgage? Everyone’s doing it

“Seventy-one percent of all borrowers were provided an online portal in the past two years,” according to a late-2017 survey by Velocify, a sales acceleration platform. “Those that were provided an online portal were twice as likely to say technology improved the loan process as those who were not provided this option.”

Okay, we get it. Online mortgage applications and communication are here to stay. With more experience and improved technology, online originations are getting easier. There’s a growing public acceptance of such systems.

Now let’s dig a little deeper. The economy is changing. We increasingly live in a gig economy. Rather than a nine-to-five job a lot of us are on our own. We work, and we work hard, but we don’t report to an office or factory.

The changing nature of the work economy raises two questions. First, how does this impact mortgage lending? Second, if we’re in business for ourselves can we also get business financing online.

Online mortgages

“Given the growth of the gig economy and its impact on how self-employed people work and earn income,” says Fannie Mae, “the inclusion of gig worker income for mortgage underwriting should not be overlooked. Borrowers with a sufficient income history that fit within investors’ guidelines are being served today, but a majority of lenders say that it is difficult to underwrite a mortgage loan with gig economy income due to its instability and unpredictability.”

Because so many people are self-employed, it’s clear that the lending system must adapt to serve them otherwise a lot of mortgage originations will be lost. A lot of origination income will also disappear without new lender standards. So yes, lenders know the self-employed are out there and they want your business.

Self-employed borrowers must also change. Lenders must verify that residential borrowers have the ability to repay a mortgage. In turn, borrowers must provide evidence to support their income claims. Since the self-employed don’t have pay stubs they must show income in some other way. Increasingly that means bank statements from the past 12 to 24 months.

Business loans

If more people are joining the ranks of the self-employed, it follows that some number of them will need a business loan for equipment, supplies, etc. Why not have a parallel online lending system for business financing?

In fact, such systems exist. But while money is money business loans and residential mortgages are very different products.

Consumer protection

As a residential mortgage borrower, you have a number of protections. You’re entitled to a Loan Estimate (LE) form once you apply for a mortgage. The LE form has been developed by the government to assure that all residential loan terms are plainly stated and easy to understand. Residential borrowers also receive a Closing Disclosure (CD) before settlement. This form – also developed by the government – lays out closing costs,

Apply for a business loan, and the assumption is that you’re a sophisticated borrower. The usual residential protections don’t apply. It’s the wild west of finance.

A new study by the Federal Reserve and the Federal Reserve Bank of Cleveland shows that business borrowers may find an array of baffling terms.

“Online lenders,” says the study, “use a wide range of descriptive terms and phrases when presenting product information. For example, products may express the cost of money in terms of ‘interest,’ ‘simple annual interest,’ ‘cents on the dollar,’ ‘fee,’ ‘factor rate,’ or as part of a ‘lump sum repayment.’

“In addition, products may entail repayment through a variety of methods, including traditional installment payments via direct monthly, weekly, or daily draws by automated clearing house (ACH), or direct draws from merchant accounts or credit card receipts. The lack of consistency across products can make it difficult for business owners to estimate interest rates and costs, and to compare products.”

How can you succeed as an online business borrower? Before signing anything with anyone have a qualified attorney and certified public accountant (CPA) review all loan offers.

Online business lenders

Residential mortgage lenders are carefully regulated. Lenders who don’t follow the rules for residential borrowers can face stiff fines and big legal claims. Business financing is different.

The Truth in Lending Act (TILA)

The Federal Reserve study explains that “in general, credit extended for a business or commercial purpose is not covered by the federal Truth in Lending Act (TILA), which requires lenders to clearly disclose lending terms and costs to borrowers.”

TILA might apply to credit cards but that’s largely not the case with business lenders.

“TILA is implemented through Regulation Z,” says the student, “which does impose certain substantive protections applicable to credit card holders, including where the card is issued for business use. Online alternative small business lenders, however, do not typically issue credit cards.”

Hard money lenders and private lenders

Many business lenders are not banks. They do not belong to the Federal Reserve system. They do not have insured deposits because they typically do not have deposits. Or branches. Or ATMs. Some of those who provide business funding are known as “hard money” lenders or as “private” lenders.

“Banks are where most participants maintain their accounts,” said the study.

“Some said they value their banks because ‘they know me,’ and are ‘safe’ and ‘regulated entities.’ Participants who have used an online lender were more likely to rank other factors more highly than trust, such as ‘likelihood of the application being approved,’ or ‘quick/easy application process.’

That a lender is not a bank may offer some advantages. Non-bank lenders may be more flexible. They may be able to act faster than traditional banks.

Non-banks may also be willing to accept more risk. Real estate flippers, for example, typically need short-term financing. Non-banks might be willing to finance such projects but only with a big down payment from the borrower and rates which are high when compared with residential mortgages.

Is that a good deal? For some flippers, it’s a very good deal; for others a disaster if projects are delayed or don’t work out. In either case, there’s a lot of risk for lenders, the very reason traditional banks often avoid such deals.

Verify your new rate (Sep 16th, 2019)