Wednesday, November 23rd, 2016
Can apps promising rapid approvals be trusted?
We live in a world where just about anything you want is just a click away. If you believe the catchy slogan of Quicken Loans Rocket Mortgage program, you can even get a mortgage with the push of a button. But does it really work like that? Or could this rapid loan approval model mean we’re headed for an app-led financial crisis? We went to the experts to find out.
Not all mortgages are created equal.
“Mortgages are not like making blue jeans, you don’t put them through one process, and one size fits all,” says Anthony Piccone, president and CEO of 7th Level Mortgage. Each borrower has unique circumstances and qualifications that determine approval.
The promise of an instantaneous 20-minute approval gives false hopes and expectations, he adds. Piccone believes that mortgage apps are more about getting potential borrowers into the pipeline and out of the mortgage shopping process.
The reality is that most borrowers, especially first-time buyers, are not savvy enough to navigate through the tedious paperwork on their own. Even seemingly simple questions like “what is your annual income” are more complicated than you think since the calculation will differ based on whether you are an hourly employee, a salaried employee, or self-employed. Getting preapproval based on unverified information isn’t worth anything, Piccone adds.
There are a lot of easy mortgage applications programs—Rocket Mortgage is the most well-known, but SoFi, LoanDepot, and Lenda offer similar services—and, for the most part, they have done a great job of marketing, according to Joe Parsons, publisher of The Mortgage Insider and branch manager at Caliber Home Loans. Rocket Mortgage’s “Push button, get mortgage” slogan is brilliant even though it’s not true, he says.
All mortgages are fully underwritten by an actual human underwriter, and this is true of all lenders regardless of size. Parsons notes that a borrower can attempt to fill out the application, but “we fill out the application because that way we know it’s done right and it’s also a lot faster.”
Applications are then run through an online automated underwriting system; the two primary ones being Desktop Underwriter administered by Fannie Mae and Loan Prospector administered by Freddie Mac. The system evaluates income, assets, credit scores, and what’s specifically in the credit report before a decision is made.
Even if the applicant gets approval for a mortgage, the underwriter has to ensure that the claims made in the application are backed up with proper documentation such as bank statements and paystubs, Parson says. So any borrower considering an online service needs to know if there will be “someone on the other end to deal with the inevitable little snags that come up.”
Rapid approval apps can’t discern the complexity of unique and fast-pace real estate markets, so while they could be helpful for a buyer in a smaller market, they likely won’t be useful to a buyer in New York City. “Many of the online mortgage apps are located in the Midwest, such as Quicken Loans in Detroit, and do not have branches of offices in New York City,” according to Collin Bond, licensed associate real estate broker at Douglas Elliman.
Bond believes that their lack of presence in New York City is indicative of their lack of familiarity with the intricacies of lending in the city. Let’s say for instance that a buyer gets approved to buy a condo, but there are outstanding issues such as pending litigation or too many units owned by a sponsor. These aren’t problems that an automated system will be able to detect, but a local expert would be able to quickly inform the borrower.
Do apps have any advantages?
Parsons admits that programs like Rocket Mortgage aren’t necessarily bad business models. “Their marketing is brilliant, and they do automate a lot of the process,” he says. “As a loan officer, I’m impressed by that technology.”
When an applicant submits an application, Quicken Loans’s system can pull a tax transcript, get verification of employment, and verifications of deposits. However, in his experience, most clients already have documentation like tax returns and paystubs in digital form, and providing this information directly to a lender who can accurately fill out the application hasn’t been a big deal for potential borrowers.
Consider all of your options
The consensus among lenders is simple: Mortgage apps take away from the human element associated with securing a loan. When you don’t shop around and learn about the different products and programs, you miss out on getting a better deal, says Parsons.
There’s nothing wrong with learning general background information, but keep in mind that some of the information could be misleading, says Piccone. Usually, it’s designed to generate sales and not necessarily educate people about the product or programs that are available.