The New World of Virtual Mortgages

If you’re used to receiving your income, paying bills and making investments without ever touching a piece of paper, the idea of applying for a mortgage and completing the entire home purchase transaction online probably doesn’t sound too far-fetched. But, virtual mortgages are still relatively new.

Top view shot of businessman using modern digital tablet and pressing on Mortgage button.

Virtual mortgages offer homebuyers a faster, more secure option than tradition paper-based mortgage applications.

Despite “mortgage-in-a-minute” advertising, buying a home remains one of the most notoriously slow and paper-intensive financial transactions.

Now virtual mortgages seem to be a viable option for homebuyers.

While Fannie Mae and Freddie Mac both have officially accepted e-mortgages and e-closings for more than a decade, the adoption of completely digital mortgages has been slow. In 2016, Fannie Mae announced its Day 1 Certainty program that includes immediate electronic verification of income, assets and employment as well as an automated system for property appraisals.

“Essentially lenders have had the technical ability to be paperless for more than a decade,” says Brian Koss, executive vice president of the Mortgage Network in Danvers, Mass. “But the fact is, only one major investor in mortgages, Fannie Mae, accepts all electronic verification and documentation for loans. And even Fannie Mae limits this acceptance to a couple of specific vendors for now.”

Koss says that while the mortgage process has become more streamlined and less dependent on paper, until every investor accepts electronic verification and accepts all of the vendors who provide the software for this service, borrowers should expect some traditional documentation to be required.

However, Lionel Urban, CEO of PC Lender, a loan origination service provider in Reno, Nev., says the momentum for paperless mortgages has definitely been picking up steam during the past year.

“Lenders can use the borrower’s name and the address of the property being purchased to research the property value and they can digitally verify their income and assets,” Urban says. “The ability to verify employment and paycheck deposits not only makes the loan application easier, it also provides a streamlined approval.”

Consumer experience with virtual mortgages

Advocates of increased adoption of new technology say that an all-electronic, virtual mortgage can close faster.

“The industry average right now to close a loan is about 60 days,” says Dominick Marchetti, chief technology officer for loanDepot in Irvine, Calif. “We can close a paperless loan in 12 days if the borrower has regular income reported on a W-2 and we know the value of the home being financed.”

Marchetti says approving a self-employed borrower is more complex and could take about 40 days, but the lender can tell that borrower from the beginning that as long as certain conditions are met they will qualify and close on time.

The big difference with paperless mortgages today, according to Marchetti, is that borrowers no longer have to upload their own information. Instead, they give the lender permission to obtain information directly from the source, such as employment information, a property inspection waiver and checking, savings and investment information.

“A nice benefit of doing everything digitally is that it speeds communication between the borrower and the loan officer,” Urban says. “And you don’t need to provide the same paperwork over and over if you can show that’s already been verified.”

Shopping among several lenders to compare rates and fees can be accomplished more quickly when borrowers use digital verification, too, he says.

“While most new homebuyers use the builder’s lender, it’s always a good idea to get at least one other quote so you can compare loan options,” Urban says. “Digital processing won’t replace the loan officer entirely, because they’re needed to coach borrowers, answer their questions and provide advice about the type of loan that would be best for their needs.”

Privacy and security concerns

Urban says that some consumers resist the new options for going paperless because they are afraid their information won’t be secure.

“Paperless verification can be done more quickly if borrowers are willing to give us their passwords and logins,” Koss says. “But only about 30 percent of people are comfortable doing this.”

Urban says that digital verification is actually more secure than traditional methods of providing information.

“Verification shows up on pop-up screens that provide information that we don’t actually retain or store,” he says. “That’s far more secure than scanning and emailing documents or emailing account numbers.”

Digital verification can be accomplished by borrowers uploading documents to an encrypted portal to avoid going through the public Internet or borrowers can provide direct access to their lenders subject to the availability of the data. Marchetti says 80 percent of loanDepot’s consumers have embraced the new system of allowing direct access to their financial information rather than uploading it.

While consumers don’t like multifactor authentication and find long passwords annoying, these steps are essential to maintain security, he says.

Future of paperless loans

Marchetti says that loanDepot is piloting programs that look at behavioral consumer data that’s already made public to provide proactive information to potential borrowers, such as someone who has put information on social media about moving to a new housing market. Eventually, he thinks technology can be used to enhance relationships between lenders and consumers and to educate borrowers.

Today though, not every bank or employer has their data online where it can be accessible to loan underwriters, Koss says.

“It’s kind of like driverless cars; we’re still just talking about it, but we’re not all the way there yet,” Koss adds. “The key is getting borrower participation and to educate borrowers on the fact that this is safer than emailing information.”

Electronic closings lag further behind paperless mortgages, primarily because not every participant in the closing process, such as the buyer’s and seller’s agents and the settlement company, is prepared for digital closings. State and local regulations can be another obstacle.

As technology advances, lenders anticipate that regulations and individuals will adapt so that eventually every real estate transaction will be handled in the cloud.
Michele Lerner is an award-winning freelance writer, editor and author who has been writing about real estate, personal finance and business topics for more than two decades. You can find her on Google+.

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