It starts out innocently enough, with a good-intentioned homeowner or buyer going online to Google: “Best mortgage interest rate” or something similar. Always looking for the best deal (like we all are), the home loan shopper instantly is flooded with thousands of paid ads, as well as over 14 million search results, all guaranteeing the lowest interest rates and the best loans. In fact, with just one click, their email will be flooded and the phone ringing off the hook with offers.
But wise consumers might want to rethink shopping online for a mortgage. Even recent articles in the Wall Street Journal, Finance under 30, etc. talk about the growing risks and dangers of using an online mortgage company for the probably the biggest and most important purchase you’ll ever make, your home loan.
Here are ten things to consider when debating using an online lender compared to a reputable and local mortgage lender:
- Timelines
Online mortgage lenders often can close your loan on time. However, they often can’t, and that means that a lot of catastrophic things happen in the meantime that lose you a huge amount of money, like interest rates going up, and just as often, a buyer falling out of escrow and losing the chance to buy the house of their dreams (not to mention thousands of dollars for the earnest money deposit) when their lender can’t close the loan on time.
- You’re just a number
Online lenders work off the business model where 80% of their budget and efforts go into attracting web traffic and enticing leads. But online lenders don’t care one iota about creating personal relationships with their clients and earning repeat customers. They don’t know you, will never meet you, and you often just represent a commission check to them.
- The bait and switch
It’s well-documented that a favorite tactic used by online mortgage sites and lenders is the bait and switch, where they get customers excited and invested with promises of great interest rates and lightning fast closing times. But anyone can promise anything, and the unwitting consumer has no way of knowing if they will actually deliver on these rates. In many cases, they do not. Although it’s technically illegal, there’s little enforcement and nothing stopping online lenders from advertising incredibly low rates and fees just to get you contacting them, only to give you the bad news that rates and fees have actually gone way up once you’re invested in their process and it’s too late to switch.
- They aren’t local
Do you really want to entrust something as important as hundreds of thousands of dollars to some shadowy mortgage company in a far-off state? Most people prefer to meet with their financial planner, CPA, attorney, banker, and other important financial service providers locally, and mortgage broker should be high on that list, too.
- Out of network appraisers
Online lenders have their own approved list of appraisers that you’ll have to use. Out-of-area appraisers often don’t understand the nuances of regional markets and neighborhoods, and are notorious for delivering ridiculously low appraisals. A home value coming back out-of-whack will instantly jeopardize your home purchase or refinance.
- Complaints
When you use a local mortgage broker, you can easily ask around about their reputation, get plenty of local referrals, and generally characterize their work and customer experiences. But if you research online lenders, you’ll probably find that they have a long list of complains with the Federal Trade Commission, as well as horrible reviews. I won’t mention any names, but even the biggest online lenders have thousands of complaints registered based on the Equal Credit Opportunity Act (ECOA), Truth in Lending Act, Fair Credit Reporting Act, Better Business Bureau, Consumer Financial Protection Bureau (CFPB) and State/local consumer protection agencies.
- Junk Fees
Online lenders commonly advertise a low interest rate (that they may or may not be able to deliver), but then make up the difference by charging you exorbitant and often hidden junk fees. While rules for disclosing fees are clear, online lenders often act with impunity and bury consumers in a mountain of fine print and disclosures that it’s almost impossible to read. Remember that it’s not your interest rate, but APR that really represents the true cost of your loan, and online lenders too often charge high computerized origination fees application fees, fees just to lock in an interest rate, and outrageous courier and other junk fees.
- Scams, security and privacy
Do you think your sensitive financial data is safe when you’re sending it to some anonymous lending company online? In fact, identity theft, data theft and online financial fraud are the fastest growing crimes in the world; with about 1 in 8 Americans affected every year. You’re putting yourself at a huge risk when you turn to the web to do your mortgage business, and additionally, there are a whole lot of outright scams.
One of the biggest online mortgage lenders just posted on their own blog that consumers should be wary of the many unscrupulous imposters that pose online as this company, but then cheat and defraud vulnerable consumers.
- Who exactly are you working with?
Let’s say you’re looking online for good interest rates and find a website with a nice name and professional-looking logo. You contact them and decide to trust them with your mortgage loan. So whom exactly are you doing business with? Chances are it’s not the same company you first contacted, as a good portion of mortgage websites and “companies” are only marketers and middlemen, who just collect your information and commitment and then sell you as a “lead” to other companies. The more they charge you and the higher your interest rate, the more these feeder companies get paid for the lead.
- Lack of communication
When you deal with a local mortgage broker that you meet and get to know personally, it’s very easy to get in touch – you just call their office, email, or even ring their cell phone number in case of emergencies, even in case of emergencies and on nights and weekends. But good luck getting your online lender on the phone. They’ll sure answer your calls quickly once they are getting you committed to doing business, but then you’ll be stuck in an endless phone tree from an 800-number, unable to talk to a real person, as they have far bigger priorities – like signing up new leads – and a long list of customers to get back to first. That lack of communication could easily kill your deal or cost you heaps of money.