The speed and ease of online and app-based shopping have raised expectations for all consumer transactions, including mortgage approval.
Competition is heating up in the digital mortgage arena, as big and small companies refine and expand their offerings.
“There’s a mix of lenders right now,” said Tendayi Kapfidze, chief economist at LendingTree, the nation’s leading online loan marketplace. “There are some lenders that have an almost completely digital process, and some lenders who have a partial digital process. But, ultimately, the industry as a whole, from application to underwriting and processing the application, is moving toward a digital structure.”
A lot of that, he said, has to do with consumer demand. “Customers are used to doing a lot of other purchases online and doing it digitally,” Kapfidze said. “It also creates for a faster process, so typically with digital mortgages, you get a quicker closing date, which is something that is appealing to a lot of consumers.”
The other side of the equation is creating a user-friendly experience and providing guidance for potential borrowers to make sure they are comfortable with such a huge endeavor.
Sammie Jones of Hampton, Ga., has bought three homes through the long and complicated traditional process. Obtaining a mortgage this year through an online lender has made a believer in digital lending out of him.
After Jones visited his lender’s website in April, he received a call from a representative, who discussed what to expect in the mortgage process. Once Jones was prequalified to see how much he could borrow, he shopped around for a home based on his budget.
“Initially, I was supposed to get my mortgage around April, but I didn’t find any homes I was interested in,” Jones said. “If I had already had the house picked out, I probably could have gone from filling out the documentation with them to closing on the loan in less than two weeks. It was just that fast. It was actually a little frenzied fast.”
Jones decided on a ranch-style home with a basement for his family, and the loan process resumed in May.
From buying his first home 24 years ago to his fourth home this year, Jones said: “I would do digital every time. It was that profound a difference. It made the mortgage process kind of enjoyable.”
Kapfidze said the key is helping borrowers get to a point where they feel that they are well informed and making the best decision.
“We try to create a lot of educational content that helps borrowers understand the various types of mortgages that exist, the way that they can prepare to position themselves as well as possible to make sure that they are getting the appropriate mortgages for themselves, that they are getting the best deal that they can get, and that they are financially prepared for this very significant obligation that they take on when they get a mortgage,” he said.
Not everyone feels comfortable yet applying for a mortgage online.
A recent poll conducted by Branded Research of 7,200 potential new home buyers found that men are more likely than women to contact lenders online. New home buyers younger than 45 are more likely than their older counterparts to start the loan process online.
Moreover, the process has not met expectations that using algorithms to analyze a consumer’s financial picture would make a digital mortgage colorblind. A new study conducted by researchers at the University of California at Berkeley raises questions about statistical discrimination and pricing disparities.
“Our results tell us that lenders have pricing schemes that enable them to charge higher interest, and thus take higher profits from minorities, even if the pricing schemes are not intentionally aimed toward minorities,” said study co-author Adair Morse, a finance professor at the Haas School of Business at the University of California at Berkeley, which published the study. “These pricing schemes instead may target borrowers who are not able to shop around more or who choose not to shop around more. If a seller knows he or she can charge a higher price without the customer shopping around, it is good business practice to do so. But this inadvertently may cause discrimination.”
Indeed, Kapfidze points to a study by the Consumer Financial Protection Bureau that found more than 30 percent of borrowers do not comparison-shop, and more than 75 percent apply for a mortgage with only one lender.
“In a similar way to ride-hailing services giving riders the option to shop for transportation reduced discrimination by taxi operators, we believe consumer comparison-shopping can reduce discriminatory outcomes in financial services,” Kapfidze said. “While the industry continues to make progress in combating discrimination, the best way for individual consumers to improve their chances of being approved and getting the best rates is to make the lenders compete for their business by shopping around.”
Dan Gilbert, chairman of Quicken Loans, the nation’s largest retail mortgage lender and an early adopter of digital mortgages, said he is skeptical of the study’s conclusions about algorithmic lending, including research that found financial technology companies offering mortgages online charge creditworthy minorities higher interest rates than white applicants.
“FinTech lenders like us are never in front of our clients,” Gilbert said. “We have no clue of applicants’ race or ethnicity unless they tell us. Over a third of our clients do not tell us this information, which is their right. But then we can’t and don’t make the visual observation because we’re not face to face.”
A silver lining in the report is that online lenders do not discriminate in application rejections, instead catering to those discriminated by face-to-face lenders.
Despite digital mortgages’ potential to save time and money, Thomas Hahn, 24, an apartment dweller in West Bloomfield, Mich., is not keen on starting a mortgage process online. He said he would rather talk to a loan officer face to face.
“I definitely think that for the first time buying a home, I would prefer to sit down with somebody, because I handle things visually,” he said. “If you’re not familiar with something, it really helps having a professional walk you through it.”
Hahn said he thinks home buyers might overlook important details in an online mortgage origination.
“A person guiding you through the loan process can point you to the things that really matter and sort out the fluff,” he said.
In 2015, Quicken Loans launched Rocket Mortgage as an online-only mortgage process. Quicken Loans chief executive Jay Farner said that although technology has automated the loan process, human interaction remains a robust feature of transactions.
“We try to take the best of both worlds, not only the technology that has been developed, but also the human touch that we’ve been doing for 34 years,” he said. “A lot of people try to do one or the other, and what we’ve done is both: leveraged technology when it makes sense, and applied that human touch when that’s needed, as well.”
Now another paperwork-heavy aspect of home buying is moving to the Internet — the closing or settlement. Technology is automating the day when all involved parties gather around a table to make the transaction official by signing stacks of paper.
Digital brokerage Redfin and online notary platform Notarize have teamed up to let customers close a property purchase entirely online.
In November, Redfin real estate agent Art Cisneros and a California couple who were moving to Austin, were involved in the brokerage’s first digital closing.
“Traditionally, we close at title companies here in Texas and sign the documentation at the title company,” Cisneros said.
“For our clients who were in California at the time, the closing seemed pretty seamless. This was a situation where they could handle the closing from home before heading off to work,” Cisneros said. “It took about 30 minutes. They were just happy with the convenience of it all.”