I was asked the other day by one of my readers whether it’s safe to use an online lender. It’s not a simple question to answer, but I’m going to lay out the conditions where I believe it’s safe, and where I would exercise caution.
The first thing to consider is whether the lender is a trusted brand. Some online lenders have established large operations serving thousands of borrowers over the years. Many of these lenders, such as Quicken Loans and Capital One Mortgage, are well-established brands with reputations they’ve invested in heavily over the years, and want to protect going forward. This is not to say any particular lender is perfect, but the ones who are spending millions of dollars advertising generally want to protect their brand image, and will have a mechanism in place for solving problems when they arise.
Second, you should check to see if the online lender has a 7-day-a-week customer care center that can be reached via a toll free telephone number. When problems surface – which they frequently do with mortgages – you’ll want to be able to access more than just your loan officer who originated the loan. Problems usually occur with the underwriting and processing departments, and you’ll want to be able to speak to someone real-time who can pull up your file electronically and help problem-solve the issue with you over the phone.
The third thing to consider is whether you’re refinancing an existing mortgage, or seeking a new mortgage to purchase a home. Generally speaking, a “refinance mortgage” has much lower risk than a “purchase mortgage.” If something blows up in the closing process with a refinance mortgage, you’ll have to delay your closing. Yes, there’s a chance you might exceed your lock period, which is the period for which your interest rate is guaranteed. If something occurs that is not the lender’s fault such as a delay in getting your documentation together, or an appraisal problem, you may very well exceed the lock period before you close. And if interest rates are rising, you’ll miss out on your previous, lower interest rate. These types of issues are sometimes easier to handle with a local lender, but they can also be handled with a high quality, responsive call center from an online lender.
However, if you are taking out a purchase mortgage, you may have the moving trucks on their way to your new home, and your kids might be starting in their new school next week. In that case, you need to be in your new home ASAP. With purchase mortgages, the stakes are higher and some borrowers prefer having a local lender. I’ve heard it best described by homeowners as: I want to make sure there is someone local to talk with face to face when problems arise. With that said, many online lenders are now establishing networks of local closing agents, who can help home owners sort through these types of problems. You should ask your online lender what type of resources they have on the ground in your home town.
My final perspective on this question is this: An online lender should really be viewed as an out-of-state lender, which is usually the case. They are still governed by state mortgage licensing laws, and if they’re a bank, by the federal banking laws. Your real risk is that they are out of state and you can’t go to their office for an in-person meeting to sort things out if problems arise. The benefit of working with these lenders is that you can oftentimes get a much better interest rate from these online lenders because they have highly efficient, centralized operations with much lower overhead costs.
I always recommend you start your search for a lender by doing some comparison-shopping and get multiple offers. There are great online resources like LendingTree, Bankrate and Zillow. These sites tend to monitor lenders for quality control, and some of them provide customer satisfaction scores for lenders on their site. You can also search customer reviews on completely independent, third party sites such as Yelp to see what other consumers are saying about the specific lender you are considering.
In life there is no free lunch. You can often get the best interest rate and APR by using an online lender, but they may not have a cushy sofa to sit in and a person across the desk to hold your hand during the process. If you choose to go the online route and seek the best possible interest rate, just do your homework with these online resources, and make sure you’re working with a reputable lender.
Visit my blog at MortgageRates.us to learn other tips to manage your home financing.
Tom Reddin, former president of Charlotte-based LendingTree, writes an occasional column for MoneyWise about mortgages and home ownership. A version of this column previously appeared on his blog, MortgageRates.us. He runs Red Dog Ventures, a venture capital and advisory firm for early stage digital companies.
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