Should you consider an online lender for your next home loan? We break down the pros and cons to help you answer that question.

The benefits of online lenders

Online lenders use digital platforms that get you a quote fast
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Online lenders use digital platforms that get you a quote fast

Often the biggest plus is convenience. Online mortgage lenders use intelligently designed websites and apps to streamline the application process, so the loans take 20% less time to process than traditional mortgages, the Federal Reserve reports.

To apply for an online mortgage, you answer just a few simple questions you can click through in minutes. If the lender asks for ID or documents, it’s often as easy as taking a picture with your smartphone and uploading it to a secure platform.

You can easily compare loans side-by-side online. And, because online lenders don't have brick-and-mortar branches, their costs are lower — and they can pass those savings on to you in the form of lower fees and interest rates.

The savings can be huge, adding up to thousands of dollars over the life of your loan.

To get the best deal on an online mortgage, you'll want to check out rates from at least three lenders. Take a look at today's best mortgage rates in your area.

How to choose an online mortgage lender

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Comparison shop for your online mortgage lender.

If you think online borrowing is the best option for you, here are some tips for choosing an online mortgage lender.

Find a lender that will offer you the mortgage you need at the best possible interest rate. An online marketplace can connect you with a large network of lenders, so you can comparison shop loan options quickly and easily. You'll land a low rate if you have an exceptional or very good credit score, so use Credit Sesame to get a free peek at your score and see if it needs work.

Look for a range of customer service options. Taking out a mortgage online does not mean sacrificing good customer service. Many online-only mortgage lenders, such as Quicken Loans' Rocket Mortgage, are known for their timely customer service and can connect you with a live person if you need one.

Make sure your online lender offers:

  • Web chat. Many lender websites now have "live chat" options so you can message with a person in real time. This can be handy when you get stuck and don't have a time to go to a branch — or if your mortgage lender doesn't have branches.

  • Telephone customer support. When web chat isn’t the best way to communicate, you want to be able to pick up the phone and call someone. Telephone customer support hours are often more flexible than branch hours.

  • Face-to-face assistance. Sometimes you just need to see a real person when you have questions. Check to see if there are branches near you with mortgage experts available, or if video chat is an option.

Size up the online application process. Does it seem easy, or are the instructions difficult to follow? Is the digital platform even right for your financial situation? If you don't have standard proof of income or if you have bad credit, it may be better for you to go to a brick-and-mortar lending office that can support more complex scenarios.

Get preapproved by different online lenders, so you can try them out. After you’ve found a few lenders you like, request mortgage preapproval from each, so you can test out their digital platform and tools.

To receive a preapproval letter from a lender, you'll need to present:

  • Income information, including pay stubs, tax returns and W-2s from the previous two years. You’ll also need to provide documents showing any additional income such as money from a side gig, overtime, bonuses, Social Security payments, retirement benefits, and alimony or child support.

  • Information about assets other than your income. Provide bank and investment account statements, and if a family member or friend is giving you money, provide those details.

  • Personal information, including a valid form of ID, such as a driver’s licence or passport. Also, your Social Security number will be required for a credit check.

Be aware that mortgage preapproval requires a lender to do what's called a "hard inquiry" into your credit, which can temporarily dent your credit score.

Why you may want a traditional lender

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You may ultimately want more of the hand-holding available from a traditional lender.

You may want to sit down with a traditional mortgage lender if you're looking for more hands-on support.

This may be especially true for first-time homebuyers who need a more thorough, step-by-step approach to help understand mortgage options.

Online lenders will usually have a phone number or online chat tool you can contact for assistance. The companies typically have loan officers available, but their hours may be limited.

Also, note that the nontraditional lenders usually work on a national — not a local — scale. A neighborhood bank might be more knowledgeable about local homebuyer incentive programs that can lower your interest rate or closing costs.

A conventional bank also may be a better choice if you need special financing — maybe if you're self-employed, have a low credit score or are interested in an FHA loan or other low-down-payment mortgage.

How to reach your decision

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You need to determine your comfort level.

Online mortgages can make homebuying a whole lot more streamlined. They offer unparalleled convenience and speed compared to traditional lenders.

However, a digital borrowing process isn't for everyone. Your mortgage is one of the biggest financial transactions you'll ever make, and you may have a ton of questions. Ultimately it's a matter of determining your comfort level.

You may decide to go with an online lender, because you want your home purchase to be as easy as buying a plane ticket or bag of dog food online.

Or, you may realize that you need more of the kind of personal, face-to-face service that's possible with a more traditional lender.

About the Author

Esther Trattner

Esther Trattner

Freelance Contributor

Esther is a freelance contributor to MoneyWise.

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