It is widely anticipated that prospective homebuyers will acquire their home financing via the internet. The fantasy is that one can “shop” for the lowest interest rate and/or loan costs, save money and do everything very quickly. While the internet is being touted as the wave of the future for home loans, there are a growing number of loan applicants that have had a poor experience.
In order to evaluate the best way to acquire a home mortgage, there are some things a borrower should know about the loan process. After reviewing all of the data, we feel there are some compelling reasons for NOT acquiring a loan through the internet.
Internet lenders have deservedly gotten the reputation that it is best designed to accommodate only trouble free transactions. Any borrower who exhibits a need for credit counseling, may be short cash, may require a co-borrower or may need help with the vast number of other aspects of home loan financing often find themselves out of luck with the internet lenders. It is generally recognized that the persons who staff the phones at these sites are trained to do one thing – get the prospective borrower to send in their loan papers. Many sites work on the theory that “if we throw enough loans against the wall, some will stick”. The end result for many is confusion and disappointment and eventual loan denial.
One of the first areas of concern is the quoting of rates and terms. Again, the quotes represent those that may be available to the most qualified borrowers – those with the highest credit ratings, sufficient down payment, etc. The rates seldom reflect those that might be offered to the more “credit challenged”. The ultimate pricing of any loan for any individual borrower is influenced by many factors in today’s lending atmosphere. All lenders now function on a “risk based pricing” (see additional tip sheet) basis wherein the borrower is evaluated via credit score, amount of down payment, sufficient reserves at the close of escrow and other criteria.
Most fixed rate loans in today’s market are “priced” to meet the requirements of the investor who will ultimately purchase the loan from the originating lender. In most cases, Fannie Mae (Federal National Mortgage Association) is that investor. All lenders (including those functioning on the internet) typically quote a daily rate related to Fannie Mae’s requirements for purchase. Thus, during any specific period frame, a borrower should receive the same (or nearly so) quote of rate and fees from every lender polled. As one investigates rates, if one lender is quoting a rate significantly better than all other lenders, a borrower should be suspicious. Some lenders, even on the internet, employ bait and switch quotes. The reality is that a lender needs the borrower’s profile in order to quote an appropriate rate.
The other aspect of loan quotes is the “lock in” period that the quote represents. A borrower will often today require a minimum 45 day “lock” (guarantee) of the rate and fees (mostly depending upon the time frame required for local appraisals). It is extremely difficult to know if one is evaluating comparable loan terms and conditions via the internet. This, too, often results in disappointment when a borrower believes that they have been approved for a specific loan amount and interest rate, but learns that the loan was never locked in.
The person with whom prospective borrowers speak on the phone often “implies” that the borrower is approved and the loan is locked in. It is only when the borrower receives their loan documents they discover the terms to be considerably different. Although surprised and disappointed when they discover what can be considered a deception, there is little recourse for the borrower.
Finally, there is the fact that many borrowers require assistance in the acquisition of their loan. This can involve clearing credit items, developing a strategy for acquiring the necessary funds or acquiring a co-borrower, etc. It is important also for borrowers to become “educated” in regards to the loan process and procedures.
Most prospective borrowers still need the help and guidance that is only available through a local lender source. The lenders on the internet are basically unaccountable. On the other hand, a local lender is accountable and must deliver on its promises, whether that involves quoted rates, costs or period for closing the loan.
It would be unfair to suggest that one can not acquire a loan via the internet. Given that it is unlikely that the loan interest rate and costs acquired via the internet will be any better (and too often they are worse) than can be acquired locally, most borrowers will be better served doing business with a lender who they know. Add in the fact that the borrower will be provided personal attention through the loan process, it makes sense to function locally. We submit that functioning locally is the best way for you to remain “in charge” of the process, know that it is proceeding in a timely fashion and be assured that you will not be “surprised” with any last minute loan details.