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Should you apply for a mortgage online? Pros and cons of digital mortgages

Larry Phillips
The Mortgage Reports contributor

Digital is good, but not always better

When you think “mortgage,” you probably picture a stuffy loan office and a mile-high mountain of paperwork.

And it’s true. Lenders require an awful lot of documentation to verify that you can afford your mortgage.

That’s why it takes over a month on average to close a home purchase or refinance.

But some lenders want to do things a better way. New, digital-first mortgage companies are using online applications and processing to speed things up.

These are the kinds of lenders advertising things like “one-click pre-approval” and “push button” mortgages. Research shows they can actually speed up closing times.

But remember — “easy” does not always mean “affordable.” Even if you want to close fast, you should still take the time to compare multiple loan estimates and find a low rate and closing costs.

You might be surprised which lender is better for you in the long run.

Find a low mortgage rate now (Dec 8th, 2019)

The rise of online mortgage applications

Millennials — the generation that accounts for the largest segment of the U.S. population — are starting to hit their home buying prime. 

According to the National Association of Realtors, millennials bought more homes than any other generation in 2018. And they’re spurring some change in the industry.

Young home buyers want their mortgage experience to include a combination of high-tech and human touch. They aren’t the only ones, either.

A recent Deloitte banking survey found that:

  • 33% of people already use online platforms to apply for loans
  • 26% of people prefer an online application for a mortgage or refinance

In response, “fintech” lenders such as Quicken Loans/Rocket Mortgage, loanDepot, Better, and Guaranteed Rate are offering “easy,” and in some cases, “one-button” mortgage applications online. 

These services are commonly known as “digital mortgages.” They offer a combination of application, documentation, and processing online.

And they’re meant to make the mortgage process much simpler and faster.

Digital mortgages reduce processing times

A New York Federal Reserve report found that fintech mortgage lenders could reduce mortgage processing times by about 20 percent compared to traditional lenders.

On average, digital mortgages reduced refinance transactions by about 14 days and purchase transactions by about 9 days.  

  • Refinance: 14 days shorter processing on average with online lenders
  • Purchase: 9 days shorter processing on average with online lenders

However, whether you apply online or offline, you’ll still need to meet the lender’s requirements to qualify for a mortgage.

And remember that rates vary by company. Just because a lender is the fastest, doesn’t mean they’ll be the cheapest for you. It’s important to weigh convenience against rates and fees when choosing a lender.

Here’s how to do that.

Pros of applying for a mortgage online

There are some clear benefits to working with a digital-first mortgage lender:

  • Get pre-approved for the home you want faster
  • Upload application documents securely online
  • Sign digitally and avoid missed-paperwork delays

Speed and simplicity are the biggest advantages of applying for a mortgage online. As shown above, online processing can dramatically reduce closing times on a purchase or refinance loan.

That’s a big benefit. With today’s historically low rates, people are eager to buy and refinance their homes — and they want to do it soon. Digital lenders aim to help you secure a low rate fast.

Many mortgage shoppers also love the idea of importing their loan documents digitally. In some cases, employers, banks, or tax servicers can upload documents directly to the lender. 

You can save a lot of time by not having to dig around for your paper W-2s, bank statements, tax returns, proof of assets and so on. 

Some lenders even let you e-sign (digitally sign) much of the documentation required for your mortgage.

Since unsigned paperwork is one of the most common reasons why mortgage transactions get delayed, the ability to e-sign reduces the chances of an important piece of paperwork going unsigned and delaying the process. 

Cons of applying for a mortgage online

Of course, a digital mortgage lender won’t work for everyone. It’s especially hard to get approved online and find a low rate if you have unusual income or credit considerations.

  • Harder to get exceptions for low credit, high debt, or unsteady income
  • You might pay more for the convenience of an all-online service

If you have dings on your credit report, are self-employed or had more than one job in the past two years, you’ll need to explain those issues to your mortgage lender.

In most of these cases, you probably won’t see your mortgage application expedited by using a digital lender. 

For example, self-employed borrowers will likely need to provide extensive paperwork such as tax returns, profit-and-loss statements or any commission income. You’ll have to work with your mortgage company to figure out the exact paperwork required and send it over.

Credit issues, such as missed payments or a past bankruptcy, also slow down the process. You’ll have to give lenders additional paperwork, including a written explanation stating why you missed payments.

In some cases with non-standard credit, a mortgage underwriter may need to manually review your loan documents. 

It’s also worth noting that rates and fees still vary by lender — and a digital mortgage lender may or may not be your cheapest option.

Compare personalized rate quotes. Start here (Dec 8th, 2019)

Don’t let convenience be the deciding factor

Mortgage rates and fees always vary by lender. And unlike online banking — where the lack of branch overhead means lower fees for customers — digital mortgage lenders aren’t necessarily cheaper by default.

Digital-first mortgage lenders aren’t always cheaper than “traditional” mortgage lenders.

Probably the best-known digital mortgage lenders are Quicken and Rocket Mortgage (owned by the same company). You know the motto: “Push button, get mortgage.”

Combined, these two companies sell the most mortgages in the U.S., and their customers give high satisfaction ratings.

But you might pay slightly more for that convenience. Quicken and Rocket’s interest rates tend to be higher than the industry average. 

Another big player in the online space is loanDepot. This company recently rolled out it’s “mello smartloan technology,” which it says can reduce closing times by 80 percent. 

However, loanDepot won’t give you a rate quote until you fill out quite a bit of personal information. The time commitment required can disincentivize shoppers from getting quotes from other lenders and finding the lowest rate.

Related: Read our full loanDepot Lender Review

That’s not to say these lenders are always more expensive. They could very well be your most affordable option.

But you won’t know unless you do your due diligence and compare rate quotes.

Find your lowest mortgage rate. Start here (Dec 8th, 2019)

Set your expectations: Applying for a mortgage takes time

Lending standards are high to protect both lenders and borrowers from making unsustainable mortgages. Stated income and no-to-low paperwork mortgages are a thing of the past. 

In most cases, you’ll need to provide dozens of pages of documents to verify your income, assets, and credit. There’s also title paperwork that many lenders haven’t quite figured out how to incorporate digitally. 

The bottom line: Applying and qualifying for a mortgage takes time — no matter how you do it.

Go into the mortgage application process expecting it to take time. Have the mindset that you’ll spend a day or two comparing companies — and that it will take about a month to close.

A few hours of discomfort (talking to lenders and getting multiple quotes) could mean big savings over the life of your mortgage. 

If a digital lender works out, and you can save on your rate and closing time, all the better.

How should you apply for a mortgage?

Simplicity and speed shouldn’t be the only reason why you use a digital mortgage lender. A fair interest rate and favorable terms should also be at the top of your priority list. 

Don’t let convenience lure you away from doing your due diligence. 

If you find a digital lender offering a fair rate, low closing costs, favorable terms — combined with the convenience of a digital mortgage — then it is probably the right choice. 

Compare personalized rate quotes to find the best home loan. Start here.

Verify your new rate (Dec 8th, 2019)