Securing a mortgage through a bank, especially for those with less-than-stellar credit, can be a difficult task. Fortunately, the rise in alternative lending is providing lots of mortgage options outside the traditional channels.
Non-bank lending ramped up as a response to the housing collapse and subsequent financial shakeup. Since then, these types of mortgages have transformed the industry. In addition to providing more transparency with mortgage rates, applying for these home loans can often be completed online in a matter of minutes.
While big banks still play a role in the mortgage market, they are no longer the driving force in the industry. Traditional lenders have to deal with high potential for legal ramification and generally low profit margins. Increased regulations in response to the housing meltdown have made mortgages far less appealing to the big lenders.
Taking the space the banks used to occupy are a variety of alternative lending options:
- Brokers acting as financial advisors, helping consumers find the best mortgages and rates.
- Smaller lenders who can overlook issues like damaged credit.
- Online lenders who are able to expedite loan approvals and payouts.
Technological advancements and changes in lending practices over the last decade have allowed the alternative mortgage market to rapidly expand. For borrowers looking into alternative financing, it’s important to know that there are a variety of options within the industry.
Perhaps the most common search result when looking for a online mortgage provider is some form of middleman. This is the simplest way for a startup to get involved in the market, and there are small, medium and large mortgage marketplaces scattered about the web.
LendingTree and Zillow are two of the most popular sites, with Mortgage Hippo and eLoan being other well-know lead generators. The business model for these companies is relatively simple: after using an algorithm to determine a borrower’s risk rate, the applicant is presented with a list of suitable lending options. The borrower then chooses which source or sources he or she will take money from, and the marketplace site collects its lead fee.
Mortgage marketplaces are relatively hands off in the actualization of the mortgage. Meanwhile, online brokers take the process a step further by advising borrowers on how to select a provider. It typically costs more and is more time consuming when a broker is involved, but mortgage seekers get much more support with this option.
Mortgage originators that operate exclusively in the digital space are becoming increasingly competitive in the lending world. Quicken Loans has surpassed many standard lenders to become one of the country’s most prolific lending companies. With the recently added Rocket Mortgage option, Quicken Loans is offering such a quick turnaround on mortgage approval that this site is the first place many people head to.
Long waits for loan approval was an industry given for many years, which is why the expedited approval offered by some online lenders is so revolutionary. Whereas bankers used to have to review applications and crunch numbers, alternative lenders simply apply algorithms that quickly determine risk levels.
At present, the home loan market is healthy enough to sustain the multitude of investors and financiers working in the industry. Because of this, companies that specialize in other lending practices have started adding mortgages to their offerings.
As some lenders look to take as big a slice of the pie as possible (Loan Depot has branched out to all 50 states in only five years), others are choosing to remain more specialized. Lenda is one such example, serving only a handful of states, but providing direct financing and multiple lending options.
Another important focus for many alternative lenders is consumers who have poor credit. The fines, lawsuits and regulations that came in response to the housing crisis forced big banks to shy away from approving loans for risky borrowers. Since mortgages are often sought by first-time homebuyers with subpar credit, lenders willing to overlook those issues have become the top option in this market.
These lenders are essentially what mortgage bankers used to be: small operations, serving local businesses and consumers. With less money on the books, smaller lenders deal with fewer regulations and don’t have to be as apprehensive when it comes to a borrower whose credit isn’t very good.
Being turned down by standard banks has also led many people to seek funding from credit unions. In 2015, over eight percent of mortgages in the United States were issued by credit unions, which was nearly twice as much as in 2010.
While the non-bank options are generally locally owned, some have managed to expand to serve on a national level. Nonetheless, these lenders don’t operate like the online loan providers and still take more time processing applications, often requiring borrowers to visit a branch in person before getting approved.
Even though alternative mortgages are a fairly recent phenomenon, the Federal Reserve estimates that this industry accounts for just under half of the nation’s home loans. Technology continues to improve the ease with which loans are originated and the market becomes increasingly competitive with each passing year.
While more and more companies move toward digital applicants and document processing, there are still providers doing things the old fashioned way and having plenty of success. In many cases, even after filling out an application online, borrowers still have to see a notary or lawyer to have things finalized.
Deciding which option is better – a mortgage marketplace or a direct lender – relies entirely on one’s personal preference and financial standing. If you’re a first-time homebuyer and don’t understand the process, you may choose extra guidance over simplicity and work with a broker. For those mostly interested in expedience, online marketplaces are the way to go.
While it might take a little bit of research to figure out which mortgage provider is right for you, homebuyers should take comfort in the fact that there are now more borrowing options than ever before.
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