If you’re getting serious about buying a house, you soon will start looking to get a mortgage. But when there are so many lenders out there to choose from, how do you start?
One of your first decisions will be to choose between getting a mortgage online and getting one from a traditional bank. Each type of lender comes with pros and cons. Online lenders are rising in popularity by offering convenience and competitive interest rates. Brick-and-mortar banks pride themselves on personalized service and a more nuanced experience.
Here’s what you need to know about the differences between online mortgage lenders and banks:
- How Online Mortgage Lenders and Banks Are Different
- Deciding Between an Online Lender and a Bank
- Red Flags and Warning Signs To Watch For
- Online Mortgage Lenders vs. Banks FAQ
- The Bottom Line on Online Mortgage Lenders vs. Banks
How Online Mortgage Lenders and Banks Are Different
Online mortgage lenders offer borrowers a convenient way to apply for a loan and submit financial documents electronically for approval and underwriting. This speeds up the process and allows homebuyers to compare offers more easily.
Traditional banks and brick-and-mortar lenders offer attentive customer service and detailed guidance for borrowers with more-complex financial situations.
Online mortgages are growing in popularity. A Fannie Mae survey shows the number of consumers who took out mortgages with only an online process increased from 7% in early 2020 to 12% in early 2021. The report also found that first-time homebuyers are more likely to be comfortable submitting their financial records electronically when compared with repeat homebuyers.
While many homebuyers use online channels in some way when getting a mortgage, most still prefer to speak with a person who can answer questions during the process.
Here are some important differences between online lenders and banks.
Interest rates and closing costs
Selling mortgages through an automated online system helps lenders save money, which allows them to offer competitive interest rates and lower closing costs. Brick-and-mortar lenders need to pay for an office and staff, which may require them to charge slightly higher rates and fees.
Banks may offer some incentives to keep the business of current customers, so be sure to ask your bank if they have any discounts or offers.
Online lenders usually specialize in offering one type of loan, which means they don’t need a full banking license and can avoid the corresponding government regulation. That helps online lenders save money, and allows them to offer perks to borrowers like more-lenient credit score requirements.
Many online lenders also allow you to see what type of rate you could get via a soft credit inquiry, which means your credit score won’t get dinged in the process.
Brick-and-mortar banks that you have a relationship with may be more familiar with your overall finances, and willing to be flexible with terms and rates.
Time to close
Because online lenders are automated, they can underwrite mortgages more quickly than traditional lenders. If time is of the essence, and you want to close on your mortgage as soon as possible, then online lenders are more likely to fit your time frame. Online lenders process mortgages about 10 days faster than banks, according to a 2018 report from Federal Reserve Bank of New York.
Demand from consumers is expected to continue motivating lenders to adopt tools that speed up the mortgage process.
With an online lender, you can apply for a mortgage or refinance and submit your financial documents from the comfort of your home, at any time of day. If you use a brick-and-mortar lender, you’ll need to make a trip to the bank branch in person during business hours.
Before you commit to a lender, it’s a good idea to get quotes from at least three lenders to make sure you’re getting the best deal. The standards and required documents are similar for both types of lenders, and the advertised rates and terms from both can be compared easily with online tools.
The main difference is in how you interact with the lender. You typically can work digitally with both online and brick-and-mortar lenders, but the latter also offers the option to do business in person.
If your financial situation is more complicated or you’re applying for certain types of loans, a traditional lender is more likely to have a specialist you can work with. This may be especially helpful if you’re applying for a government-insured mortgage — like a loan backed by the Federal Housing Administration or Veterans Affairs — or if you’re self-employed.
Since a home loan is a major financial commitment, some homebuyers are more comfortable meeting face to face with a loan officer to get their questions answered. While many online lenders have people you can speak with on the phone, you’ll do most of the process on your own.
Online mortgage lenders typically operate on a national level, which means they might be unaware of any nuances in your local housing market. Local brick-and-mortar lenders often counter that they could offer a better deal based on market conditions in your area.
Deciding Between an Online Lender and a Bank
As you weigh the decision between online lenders and banks, think about whether you value convenience and efficiency or personal attention and direction.
“Broadly speaking, online banks are going to offer a faster, simpler approval process, often with better rates, while traditional banks are going to move more slowly, but offer more service and guidance along the way,” says Martin Orefice, CEO of Rent To Own Labs, a real estate platform based in Orlando, Florida.
But borrowers who aren’t tech-savvy enough to confidently navigate the process may be happier with a bank, says Marina Vaamonde, a Houston-based commercial real estate investor and founder of PropertyCashin, a platform for off-market properties.
“With a bank, you can talk to and meet with a lender to walk you through the process, and you can explain more complex questions to them face to face, rather than through a chatbot,” Vaamonde says.
Making the right choice for you involves understanding the differences and matching your needs to the right type of lender.
Red Flags and Warning Signs To Watch For
Unfortunately, online lending scams are common. Predatory lenders may advertise interest rates that seem too good to be true, only to later tell you that you no longer qualify. They also may promise attractive rates only to charge large hidden fees. You should never pay upfront fees, and you should reject any unsolicited offers.
It’s important to research the lenders you’re considering, and make sure that they’re reputable. Confirm that each lender is licensed in your state and registered with the Better Business Bureau before you give them any personal information.
Once you have a loan estimate, carefully read through all the terms, and ask questions about anything you don’t fully understand. Approval from a lender is gratifying, but it’s more important to know you can afford the mortgage.
Online Mortgage Lenders vs. Banks FAQ
Check out the answers to a couple of frequently asked questions on this topic.
Many lenders offer you the option to apply online for pre-qualification or preapproval. If you have questions, you can speak to a loan expert over the phone.
Refinancing online is a process that the coronavirus pandemic has made more common. You’ll be taking many of the same steps as you did when you first took out your mortgage, though refinancing is often less complicated and can be processed faster. You’ll apply with the required financial documents, and then the lender will review your eligibility. In some cases, your closing can even be done virtually.
The Bottom Line on Online Mortgage Lenders vs. Banks
If you’re looking to buy a home, there are plenty of options when it comes to mortgage lenders. Online lenders and banks can finance or refinance your home purchase if you’re approved, but each type of lender has pros and cons. Online lenders offer speed and convenience, while brick-and-mortar lenders can provide personalized service. Ultimately, what matters is that you choose the experience that best suits you and will help you find the right mortgage for your situation.