The pros & cons of traditional vs. online mortgage applications

Understanding the difference between the traditional vs. online mortgage application process

So, you’re starting to think about buying a house. Let us be the first to say “Congratulations!”, and also the first to say, “Take a deep breath”. The process can feel intimidating to a lot of people, and studies say it can be one of the most stressful things you can go through in your life. Even starting the process can be stressful, as many people don’t even know when they should begin looking — or thinking about looking. 

One place to start is to think about your mortgage. In this day and age, many of us love to do our shopping online, so why not shop for your mortgage online? 

There are a lot of good online options for mortgage shopping out there.  However, applying for a mortgage online isn’t for everyone – which is why we decided to look into the pros and cons of online vs “traditional” mortgage applications.

Are online mortgages the same as “traditional” mortgages?

Yes, you will find the same types of mortgages online or sitting down with your banker; from conventional, jumbo, to FHA, and more.  Larger, well-known banks such as Bank of America or Chase give customers the choice of applying online or in-person.  Whereas many online-only lenders such as Rocket Mortgage, offer a completely digital experience from beginning to end.

The pros and cons of applying for a loan online or in-person (traditional)

Traditional mortgage application:

Pros

• Work first hand with a loan officer
• Don’t need to be as technically savvy
• More 1 on 1 help for people with bad credit or other hurdles to being approved
• Can take advantage of established relationships with your bank or credit union which may help you have access to better rates

Cons

• In-person application may be a negative when trying to social distance
• Have to do more research to make sure your lender offering you the best rate
• The overall approval process may take slightly longer than the digital lending process

Online mortgage application:

Pros

• Apply through app or portal
• Real-time tracking of loan approval status
• More competitive interest rates & lower fees due to less overhead
• Easier to compare lenders to find the best rates and offers
• Faster pre-approvals

Cons

• No personal relationship with the lender 
• It may be more difficult to connect with people to get your questions answered
• Privacy/security concerns about uploading or emailing private documents
• First-time homeowners may find the online mortgage world difficult to navigate

How online and in-person mortgages are the same

Either process works fine, and one does not give a greater advance in approval in the end.  It’s thinking through what process is best for you (and your partner if applying jointly).  And, remember, you can start with one and move to the other.  

• Both federally regulated
• Same documentation needed
• Same approval process – including a credit check, debt to income ratio, etc…

Whether you are applying for a traditional or online mortgage you will first need to be ready with the following:

• Assets and debts
• Income verification
• Bank statements and 2-3 years of tax returns
• Details about the property you are applying for

5 Factors you should consider before deciding to apply for a mortgage online or in-person   

1. Credit Score: It’s one of the most important factor while applying for a loan. Most lenders prefer to offer home mortgages to applicants with scores of 700 and above.  That doesn’t mean you won’t qualify for a mortgage but lower scores will have a negative impact on interest rates and the type of loan you may qualify for.

2. Debt: It’s important to pay off as much debt as you can before applying for a loan.  Lenders look at your income to debt ratio when considering your application.  Ideally, it should be no more than 28%.  Focus on getting rid of revolving debt first and consider consolidating debt when possible.

3. Income: Having a steady, reliable income is important when you apply for a mortgage.  Lenders like to see regular income deposits into your bank account going back at least 2 years along with job stability.  They also like to see that you have a financial cushion in your bank account.  So, if you are paying off some of that debt don’t drain your cash reserves doing it.
   
4. Know what you can afford: There are plenty of online sites such as Zillow you can use to take a look around and see what’s out there. This is the time for you to figure out what neighborhoods, house size, yard size, etc that will all affect house prices and what you can afford.  Don’t apply for houses that you most likely won’t be able to afford the mortgage, property taxes (if applicable) or the down payment.
   
5. Down payment: The larger the down payment you can put down on a house, the greater the chance you will have of being approved for your mortgage.  A typical down payment is 20% but there are loans, such as FHA (first-time home buyer loans) that require as little as 3.5%.  There are also programs such as down payment assistance programs if you need help coming up with a down payment.  

How does an online mortgage work?

If applying through an online lender you will need to have electronic or scanned copies of all of your documents to upload them.  Once you have submitted your application you should expect to hear from a loan officer within 24-48 hours.

The general steps of online mortgage approval are:

1. Pre-approval
2. Document and application submission
3. Loan processing
4. Closing

You should expect the approval process to take at least 2-3 weeks.  Depending on the lender you may be able to go through the entire application process straight through signing (if you work with an online title company) online

How does the traditional mortgage application work? 

The same general loan application process outlined above applies to the traditional application process.  You will probably find yourself uploading documents or signing something online even if your original loan application was in person. The main difference will be that you have a personal relationship with your banker to walk you through each step.

Online vs. traditional mortgages FAQS:

1.    Do online mortgages offer different loan types compared to traditional mortgages?

No.  There are a variety of mortgage types that you can apply for online or traditionally, including:

• FHA mortgage
• 30-year fixed-rate mortgage
• 15-year fixed-rate mortgage
• Adjustable-rate mortgages
• VA mortgage

Not all lenders may be qualified to offer all types of mortgages so you need to know what you may qualify for and apply with lenders that meet your needs.

2.    Can I get an online mortgage as a first-time buyer?

Yes! Not all providers will offer online mortgages to first-time buyers, but many do. Click here to see a list of some that do. Take some time to look at each provider’s websites, their FAQs, and other information, to see which ones offer online mortgages to first-time buyers and focus on those.

3.    Are online mortgages safe?

Yes, no less safe than a traditional mortgage application.  Online lenders are often referred to as alternative lenders or bankers.  More online loans are originated now than traditional. 

4.    Is it better to go with a local bank for a mortgage?

If the relationship and meeting face-to-face is important to you, then working with your local bank is a smart move.  They may even offer you lower rates if you manage your other banking needs with them.  

5.    Can I get an online mortgage with bad credit? 

It’s possible to get an online mortgage with bad credit, but you’ll want to do some homework before submitting any applications. Look at lenders’ minimum credit scores for a conventional or FHA loan. Applying in person will give you more personalized guidance on what you need to do to get approved.

6.     Will shopping online for a mortgage hurt my credit score?

If you’re just shopping around for a mortgage that won’t hurt your credit score.  But if you start submitting applications for multiple loans you could hurt your credit score because these are reported to credit reporting agencies like Equifax and will cause a small dip in your score. 

7.     Can I get a mortgage preapproval online?

Yes, you can get preapproved for a mortgage online.  Preapprovals are generally valid from 60 – 90 days.