P2P Mortgage Loans - A Growing Trend
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. (To learn more about this phenom, see: Peer-To-Peer Lending - Determining The Future Of Banking Across The World and Peer-To-Peer Lending Breaks Down Financial Borders).
Up to now, the vast majority of P2P loans have been personal, used to finance home improvements or pay off credit card debt. But of late, the number of P2P lenders getting into the mortgage business has been on the rise.
San Francisco-based peer-to-peer lender SoFi offers both mortgage and mortgage refinance loans in 23 states and the District of Columbia, with more on the way. Another firm, National Family Mortgage, facilitates peer-to-peer home mortgage and re-fi loans among relatives. LendingClub Corp. (LC), which claims to be the world’s largest P2P online credit marketplace, said recently that it planned to expand into mortgages soon. There's even a P2P that specializes in the commercial and residential mortgage industry: LendInvest, based in the U.K., which recently lowered its investor minimums (its loans are not available to U.S. borrowers, though – at least, not yet).
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 (you) 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.
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
Currently, the global P2P market is estimated to be worth at least $180 billion globally according to Business Insider. While some critics have called the industry overhyped, there's 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.