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The Pros and Cons of Using an Online Mortgage Lender

By Thomas O'Shaughnessy | November 28, 2022

In many ways, getting a mortgage today is much simpler than it used to be. In a matter of minutes, you can get prequalified for a home loan online, find out how much of a house you’re likely to be approved for, and apply directly for a mortgage, all with a few clicks and keystrokes. 

Although digital mortgages can streamline the application process, using an online-only mortgage lender has its limitations. If you’re in the market for a home, here’s everything you need to know about online mortgage lenders and whether they’re the right choice for you.

Online vs. Traditional Mortgage Lenders

An online mortgage lender is a lender that operates solely online. It does not have physical locations or branches and exists only in the digital space. It could be a bank or financial institution, but does not always have to be.

A traditional mortgage lender may offer online mortgage application services, but also has brick-and-mortar locations you can visit. Traditional mortgage lenders allow you to meet with real representatives to apply in person or online.

Since online mortgage lenders operate a little bit differently, there are a variety of benefits you may receive when partnering with an online lender — but there are also drawbacks you should consider especially when you are seeking comparable mortgage rates.

Pros of Using an Online Mortgage Lender

Here are some advantages to working with an online lender for your home loan.

1. Faster, More Streamlined Process

Without physical locations and representatives on the ground, online mortgage lenders compete by offering a better digital experience. Many online-only lenders have worked out the kinks in a traditional mortgage application process so that you’ll sail through the required documents and signatures.

Many online mortgage lenders connect directly with your bank, so they can verify your financial documents — such as your income and savings — right away, allowing you to complete the application even faster.

Though traditional lenders also offer digital application experiences, they’re often not as smooth as online lenders.

2. You Could Lock in Lower Rates

Online financial services can often provide you with benefits in the form of better rates that traditional institutions can’t compete with. Why? Without the overhead costs of managing physical locations and hiring people to run those offices, digital-only lenders save money. And many of them pass some of these savings directly to you, the consumer, in the form of lower interest rates and fees.

This could mean you’re able to secure a lower fixed rate with a fully online lender than you are with a traditional lender. This could be helpful as you prepare to pay other costs throughout the process, such as closing fees.

3. It May Be Easier to Get Approved for a Home Loan

Since many online mortgage lenders are not banks, they have a little more leniency when it comes to approving buyers for home loans. This means you might have an easier time getting approved with an online lender, especially if you have nontraditional income or a credit score that’s slightly lower than most banks require.

Cons to Using an Online Mortgage Lender

Now, we’ll run you through some of the major disadvantages to using an online mortgage lender.

1. The Mortgage Process Can Be Complicated

Although online lenders have streamlined the mortgage application process — that’s not always a good thing. Sifting through complicated legal documents on your own and easily signing online is convenient, but it could get you in trouble down the line if you don’t fully understand exactly what you’re signing.

2. Customer Support Can Be Difficult to Track Down

With a traditional lender, if you have a question, you can go to a physical location and ask them in person. You’re able to speak to an experienced agent or representative, and you can raise any questions or concerns you have about the process.

While online lenders have customer support you can access, it can take some time to get a representative on the phone or online chat. And it can be difficult to know if you’re talking to an experienced agent who understands your financial situation. Ultimately, you’re trading off this benefit when opting for an online mortgage lender.

3. You May End Up With a Higher Rate Than Advertised

Though online mortgage lenders can offer lower rates, it doesn’t mean you’ll qualify for them. Many times, the lowest rates are reserved for those with excellent credit, or may only be achievable if you put more money down or apply for a certain loan type.

When it comes to fixed rates, you might find you’re approved for a low rate initially, say 5.5% APR, only to see the mortgage rates jump up to 6.1% APR when you close. Since rates change daily, it’s important to request to lock in your rate, a feature you may not be aware of when applying for a mortgage online.

Which Type of Lender Is Best for You?

Ultimately, whether you work with an online or traditional mortgage lender, it’s important to shop around. Compare rates from different lenders, look into different home loan options, and then narrow down your top choices.

Then, consider other factors. If two lenders seem similar, but one is online and one is traditional, decide which perks are more important to you. Do you like to know who to contact if you have questions? Then a traditional mortgage lender may make more sense. Are you looking for a simple, fast mortgage application process? In that case, an online lender might make your experience less stressful.

You can also ask any questions you have upfront to your potential lender, whether online or traditional, to get a good feel for how they respond to you before making a decision. Just like you would weigh commission costs when selling a home, weighing a lender’s fees is important. 

The Bottom Line

Online mortgage lenders offer competitive rates, a host of mortgage options, and easy-to-use, intuitive online tools. On the downside, customer service can be tricky to track down if there’s a hiccup in the process.

We recommend talking to your real estate agent if you have questions about specific mortgage lenders. They can share their experiences and refer you to lenders that other buyers have had success with in the past.

Lastly, if you find you’re not ready to buy, exploring a rent-to-own option might be worthwhile

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