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Updated on Thursday, March 7, 2019
It seems so easy: Just download an application on your smartphone, spend 10 to 15 minutes inputting some information, and in minutes you’re pre-approved for a loan to buy a house. Digital mortgage products are coming to a neighborhood near you, but not all digital mortgage platforms are created equal.
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“There’s a mix of lenders right now,” said Tendayi Kapfidze, chief economist at LendingTree. “There are some lenders that have an almost completely digital process, and some lenders who have a partial digital process. But, ultimately, the industry as a whole, from application to underwriting and processing the application, is moving toward a digital structure.”
For some borrowers this could mean a much faster process with fewer documents — but it’s important to understand how the digital loan process works before you decide if you should get a digital mortgage.
What is a digital mortgage?
There is no uniform definition of a digital mortgage. Some lenders have digitized only the initial application process, while others have streamlined the processes to the point where borrowers need to provide little more than an initial application and e-signatures — the rest of the verification is done automatically.
According to a recent survey by Fannie Mae, the primary reason that consumers want a digital mortgage experience is to reduce the amount of paperwork they have to provide. Because mortgages need to verify their borrowers’ income, assets and credit, it’s not uncommon to provide dozens, if not hundreds, of pages of documents to obtain a final approval.
All of the regulatory changes of the past decade have resulted in new mandatory forms that can easily bring the total page count of an initial loan package to 80 pages or more. Being able to e-sign can save printer ink, paper and above all, time and paperwork stress overload.
Here we’ll discuss how the different parts of the loan process have been digitized, and what you can expect from each.
The digital loan process
The digital mortgage approval process is not that different from the standard process of getting pre-approved for a home loan. Your income, credit and assets still need to be verified; the lender still has to determine the market value of the house you are buying; the title officer still needs to review the ownership history to make sure you can take possession of the home without any problems.
What’s different is how much paperwork, if any, you’ll need to provide to complete your loan.
The digital loan application
Most loan officers will be able to give you access to a link to apply for your mortgage online. The lender will be automatically notified by email when the application is finished, and the loan officer can often provide you with an automated approval decision within minutes of the completion of the application.
You may be able to fill out the application from a smartphone, but in most cases it will be easier to complete the loan on a desktop or laptop. Many digital loan application sites will also give you the option to begin uploading initial documents like paystubs, W-2s and bank statements, so the loan officer can give you a solid pre-approval.
A growing number of lenders actually have a dedicated app that you can download to your smartphone to fill out the application quickly. Some of the apps will allow you to access data about the status of your application, so you know what’s going on at every step of the loan process.
Digital disclosure signing
Once you’ve shopped around for your mortgage loan and found a company you want to work with, they’ll send you loan disclosures. These include a loan estimate that outlines the preliminary costs of your loan, as well as the interest rate and monthly payment.
Besides the loan estimate, you will need to review several other federal forms, and there may be disclosures specific to the type of loan you are taking out. Some states have forms as well. You can scroll through and read each document, and once you’re done, e-sign the documents to let the loan officer know you wish to proceed with the full processing of your loan approval.
Digital loan documentation gathering
Once your loan officer has provided you with an automated pre-approval, you’ll need to provide all the documentation that is required. Most often, this will require at least a current paystub and W2, and a current bank statement.
Depending on who you bank with, and how large your employer is, some lenders may be able to access your information through your employer’s automated employment services platform. They might also be able to access your banking information through a digitized platform that gives them access to your bank balances and transaction history.
In a perfect digital world, this could mean that you wouldn’t have to provide any income or asset documentation at all to be approved for a loan.
Digital communications throughout the process
You can expect to be notified by email or text, or both, throughout the process in the digital mortgage lending world. Messages may include correspondence directly from the loan underwriter regarding any items outstanding with your approval, as well as milestone updates on the closing timeline, and any pending deadlines like your contract closing or lock expiration date.
Many of the new digital apps will allow you to check on the status of your loan in real time, with the same access to the loan information that is provided to the loan processor.
Appraising your home the digital way
Fannie Mae and Freddie Mac have re-introduced an option that allows for a loan to be approved without a full appraisal. If your property receives a Fannie Mae property inspection waiver (PIW) or a Freddie Mac automated collateral evaluation (ACE), you may not need to have an appraisal.
That’s great news for a few reasons. First, obviously, is the savings of $350 to $700 on the appraisal fee. Second is not having to wait the 7 to 10 days it can take to complete a traditional appraisal, which requires an inspector to evaluate not just the property you are buying, but comparable properties, while condensing the findings into a 40-page report called a uniform residential appraisal report (URAR).
Title work the digital way
Title insurance is required on any mortgage loan to protect the lender, and ultimately you, from claims against the property you are buying due to claims against a prior owner. Like all of the other digital processes, lenders have begun offering a digital version of title work.
Not all title companies are participating in digital signings, and the title company has to have special authorization to perform extra due diligence since you’ll be signing without being present in person — creating an addition layer of fraud risk for the title company.
The digital closing process
The digital closing disclosure process is very similar to the digital loan estimate disclosure process. The only difference between the loan estimate and the closing disclosure is that the loan costs are finalized, and once you’ve signed a closing disclosure, very few changes can be made.
Once the closing disclosure goes out, most lenders still require you to sign in person at a title company, in front of a notary, and provide a picture identification to an attorney or escrow officer who will witness your signature on the loan documents. Once the package is signed, the lender sends the wire of the loan funds, and the property records into your name and you receive your keys.
The digital closing allows you to sign the entire package electronically. That means you can sign wherever you are with e-signatures, and once the signing is complete, the lender funds the loan and authorizes the recording of the property into your name, and you officially become a homeowner.
When a digital loan makes sense for you
Digital loans hold a lot of promise for borrowers who have simple income, work for a large employer, and keep at least an amount equal to their down payment plus closing costs in the bank. Here are some characteristics of borrowers that will benefit the most from a digital mortgage experience.
Stable salaried or hourly income
If you’ve been on the job for two years and have stable or moderately growing income, the automated system will very likely only require a current pay stub. If you work for an employer that uses a third party employer verification system like “The Work Number,” it’s very possible you won’t have to provide any income documentation at all.
Down payment in the bank for two months
If you keep an average balance in your account that is about equal to what you’ll need for your down payment and closing costs, the automated system may only require a current bank statement. If you use a large national bank, some digital lenders may be able to access your balance and transaction history, and not require you to provide any bank statements at all.
The higher your credit score is, the more likely you are to have very few conditions required by the automated underwriting system.
You are buying in a strong real estate market
If values in the area you are buying are steady or increasing, and you are making at least a 20% down payment, it’s very likely you won’t need an appraisal. The automated system can track recent closed sales from public records and if the property you are buying is priced within a reasonable range of those sales, you may be eligible for the appraisal waiver.
You are taking title individually
As long as you aren’t taking title in a trust or some type of business entity like an LLCs, the digital title option should be the simplest possible.
When you shouldn’t get a digital mortgage
If you’ve got income, credit or down payment challenges, lenders may end up having to take a more traditional approach to your loan approval. You’ll probably still be able to e-sign most of your documents, but other parts of your process will require more work and documentation on your part.
Income fluctuations and employment instability
If you’re new on the job, have had more than three jobs in the last two years, or have had large fluctuations in your income, you’ll need to provide extra documentation and explanations in order to obtain a final approval.
The same is true if you are self-employed — more than likely you’ll need to provide tax returns and profit and loss statements to show your income history and how the income is flowing currently. Commission, bonus and fixed income like retirement and Social Security may also require additional documentation.
Large deposits or gifted down payments
If you’ve recently deposited a large sum of money into your account, or are getting a gift for your down payment, the lender will require additional documentation for your approval. This will likely include a letter of explanation for where the funds came from for large deposits, and a paper trail of gift funds including a gift letter, and proof the donor had the funds on hand to gift to you.
Retirement fund liquidations, 401k loans or the sale of a vehicle for a down payment will also require additional documentation.
Low credit scores, or major derogatory events like bankruptcies and foreclosures, will require much more documentation and explanation, and may even require an exception by an underwriter to obtain approval.
Any of the above is likely to trigger a full appraisal requirement
If credit, income or down payment sources are challenging, more than likely the lender will require a full appraisal inspection. The lender will want to make sure the collateral for their loan is more solid, if they are making a loan to a borrower that has a higher risk of defaulting due to weaknesses in other parts of their loan application.
There are also property types that may trigger a full appraisal requirement, such as condominiums, multi-family properties, and any type of fix-up property. Keep in mind if you start off looking at single-family-residence and you are approved for an appraisal waiver, but end up buying a condo or other type of property, you could end up having to pay for an appraisal to finish the loan.
How to have a positive digital mortgage experience
There are a number of tips that will help improve your digital mortgage experience, as long as you’re prepared to do a little more work to fill out the most accurate and complete loan application possible. Although you may need minimal documents to close your loan, there are still a number of checks and balances the lender will make along the way, and any discrepancy from the information you provide could trigger a request for additional documents.
Here are a few things to watch for:
Provide accurate employer information and employment dates
Since digital mortgages are checking information against your employer’s database, you’ll need to make sure you provide accurate contact information, and start and end dates for the last two years of employment.
Be sure to use pre-tax income for your monthly pay — if there is a substantial difference between the pay you list on your application and the amount that is digitally verified, you could end up having to provide more income documentation and explanations for the difference.
Only add banking information for accounts you’ll use for your down payment and costs
If you have other asset accounts that aren’t needed for your down payment or closing costs, don’t list them on the application. Cash value life insurance accounts, IRAs or 401ks are only needed if you will be drawing money from them for your down payment.
Advantages and disadvantages of a digital mortgage
The table below provides a side by side comparison of the advantages and disadvantages based on the different parts of the loan process. Not all lenders are offering a fully digital experience, so use this table as a reference point when you’re talking to lenders about the digital process they currently offer for mortgage lending.
|Digital loan process||Advantage||Disadvantage|
|Loan application||Faster decisions and ability to upload documents with initial application||May have compatibility problems with different devices and browser issues as well|
|Loan shopping||Completely digital, with quick decisions and fee sheets generated by multiple lenders||Requires the same information be input each time — any discrepancies in input could lead to inaccurate rate quotes|
|Loan documentation||May require little to no documentation, depending on employer and current bank||Any variations in income stability or asset balances may trigger additional documentation requirements|
|Appraisal waiver||May not need an appraisal at all||You don’t get the valuable market information provided by a full appraisal|
|Digital title preparation||Allows for e-signing of closing documents||Limited number of title companies participating means you may lose choice to shop for competitive rates|
|Closing document preparation||Streamlined e-sign process means less signatures and a faster closing process||Any changes to program, property, loan amount, price or closing costs could result in a traditional mortgage closing process|
|Final signing and closing||May allow for e-signing of closing documents, including deed of trust and note||Limited number of companies offer, and potential for identity theft since borrower signatures are not witnessed by someone in person|
Final thoughts and conclusions
Although computer algorithms and digital processes can simplify the mortgage approval process, it’s not likely artificial intelligence will replace the value of a human loan officer. There are simply too many different chapters in most people’s financial histories, and although digital mortgages hold promise for a simpler process for the most qualified borrowers, anyone who has had bumps in their financial road will still benefit from a combination of digital improvements and the guidance of a knowledgeable loan officer.
One final caveat about digital mortgage lending: Be sure to check on the credentials of anyone you’re talking to if you’re only looking at online lenders. Applying for a mortgage requires you to provide more personal information than any other loan transaction you will make in your lifetime.
That means that hackers and identity thieves will go to great lengths to get access to your information by advertising themselves as digital lenders or loan officers. You should always verify the license of both the company and any loan officer you are talking to by going to the Nationwide Multistate Licensing System (NMLS) consumer access page — if an online lender contacts you first, ask them for a phone number to call them back, and verify it before you start giving them any financial information.