The past decade has seen an internet-fueled trend in peer-to-peer (P2P) lending. It's a form of financing that allows borrowers to obtain a loan from a group of individual lenders without going through an intermediary, such as a bank. Growth in the industry is set to go to new heights. According to a 2017 Bank of America study, 36% of adults said they used a P2P lending service. The global P2P market was estimated at $67.93 billion in 2019. And by 2027, the global industry was expected to climb as high as $558.91 billion according to a report from Valuates.
Up to now, the vast majority of P2P loans have been personal, used to finance home improvements or pay off credit card debt. But lately, the number of P2P lenders getting into the mortgage business has steadily increased.
Popular P2P Lenders
San Francisco-based peer-to-peer lender SoFi offers both mortgage and mortgage refinance loans in 29 states and the District of Columbia, with more on the way. Another firm, National Family Mortgage, facilitates peer-to-peer home mortgage and re-finance loans among relatives. LendingClub Corp. has issued more than $60 billion in loans and has discussed plans to expand into mortgages. There's even a P2P specializing in the commercial and residential mortgage industry – LendInvest, based in the U.K. – that recently lowered its investor minimums (its loans are not available to U.S. borrowers at this time).
How It Works
The process of obtaining a P2P mortgage loan varies by company, but typically follows a pattern similar to that outlined by SoFi:
- The borrower begins an online application and receives pre-qualified interest loan amounts and interest rates.
- You choose the loan amount and interest rate most appropriate for you, complete the application and receive a letter of pre-approval for your loan.
- You submit your offer to the seller and close the loan. At this point, you upload your purchase agreement, lock in your interest rate, obtain a property appraisal and sign the final documents.
According to SoFi, typical mortgage loans close in 30 days or less.
Pros and Cons
Before applying for a P2P mortgage loan, it’s worth considering both the pluses and the minuses.
On the upside:
- P2P lenders tend to approve people with lower credit scores.
- Interest rates on P2P loans are often lower than those offered through a traditional lender.
- Service fees are often lower as well, reflecting the lack of overhead that P2Ps have.
On the downside:
- The time to process and approve the loan may be longer — possibly a product of a lower credit score and the need to vet borrowers more completely.
- Collection fees (for borrowers who don’t pay on time) can be very steep, eroding any interest advantage offered by this type of loan.
As we mentioned above, one of the advantages of using a P2P lender for a mortgage is that they tend to approve people with low or fair credit scores. This is something new homeowners, especially millennials, will likely appreciate. People who fall into these categories tend to be pushed out of the mortgage market. But with the rise in the P2P market, many people who have been locked out, including those who are starting to develop their credit histories, are finding ways to make homeownership a reality.
A Mix-and-Match Option
With so few companies offering P2P mortgages, some borrowers have turned to a hybrid strategy: They finance the down payment for their property with a P2P loan and the balance with a conventional loan. Obtaining a P2P loan and actually using it for a down payment are two different things, however. Be sure to check whether your mortgage company or bank will even accept the use of a P2P loan as a down payment.
The Bottom Line
The American P2P market is projected to be worth $558.91 billion by the end of 2027. While some critics have called the industry overhyped, there is a high likelihood that the mortgage loan footprint of P2P loan providers will grow. As more and more P2P providers compete for mortgage customers, this new type of loan is probably worth looking into in order to compare it to other, more conventional loan sources. It could be a viable option for anyone who has difficulty obtaining conventional financing or for those with excellent credit who desire a simpler process and lower interest rate.