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

The mortgage process requires a lot of paperwork and often takes a long time. 

Luckily, mortgage lending has recently digitized like many other industries. 

There are now all-online mortgage options that make lending faster, simpler, and sometimes more affordable. 

But is a digital mortgage always best? And how does the process really work? Here’s what you should know. 

Get started shopping for a mortgage (Jan 16th, 2022)

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What is an online mortgage?

In the past, an online mortgage was a home loan from a lender or mortgage broker who had no brick-and-mortar presence. However, as the popularity of online lending has increased, even FDIC-insured banks and credit unions with physical branches now offer borrowers online services.

You can apply for just about any type of mortgage online, including:

  • Conventional loans 
  • FHA loans
  • VA loans 
  • USDA loans
  • Jumbo loans
  • Other speciality loan programs

Not only can digital mortgages be secured by first-time home buyers entering the real estate market, but also homeowners ready for a new home or who are interested in refinancing their existing mortgage loan or accessing their home equity.

How the online loan application process works

The online loan application process will vary depending on the lender or mortgage broker that you’re working with. Yet, most online lenders provide many of the same services as brick-and-mortar lenders. 

You can get prequalified and preapproved for a new home loan, request mortgage rate quotes, submit a loan application, and upload financial documentation, such as pay stubs, tax returns, bank statements, and more.

Additionally, you can close on your home mortgage and e-sign documents (digitally sign) — all from the convenience of your home.

Continued popularity of online mortgage applications

According to Fannie Mae, the use of online-only mortgage lenders increased 5% between 2018 and 2021 (7% to 12%, respectively).

Furthermore, first-time home buyers are more likely to give electronic access to their financial records, compared with repeat home buyers. 

Researchers suspect that the rise of online mortgage applications could represent a demographic shift “since many younger consumers grew up allowing digital apps and online companies access to their financial information.”

Additionally, 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 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 (financial technology services) such as Quicken Loans, Rocket Mortgage, loanDepot, Better, and Guaranteed Rate claim to offer “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 can close faster

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

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

  • Refinancing: 14 days shorter processing on average with online lenders
  • Purchasing: 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 mortgage 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.

Reasons to apply for a mortgage online

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

  • Get preapproval 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 interest rates still near historic lows, 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 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 mortgage 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 when you apply for a mortgage online. 

Self employed

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 score issues

Credit issues, such as missed payments or a past bankruptcy, also slow down the mortgage approval 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. 

Compare personalized rate quotes. Start here (Jan 16th, 2022)

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.

Online 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 offers “mello smartloan technology,” which it says can reduce closing times by 80%. 

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.

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.

Keep in mind the total cost

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

Be sure to get multiple quotes and compare loan options and borrowing expenses including underwriting and origination fees, title insurance, and other closing costs.

Using a mortgage calculator is a helpful way of estimating how much home you can afford and your potential monthly payments, based on your credit score, down payment, and loan terms. 

Also, keep in mind that home buyers will also need to factor in other costs into the total expense of purchasing a home, such as real estate agent commissions (often 5%-6% of the loan amount), homeowners insurance, and private mortgage insurance (for conventional loans obtained without a 20% down payment). 

Find your lowest mortgage rate. Start here (Jan 16th, 2022)

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 score. 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 lenders and mortgage brokers — 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.

Apply for a mortgage online today

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 during the home buying process. 

If you find a digital lender offering a fair rate, low closing costs, favorable loan 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 (Jan 16th, 2022)