There are three basic components to marketing any product or service: Price, Quality and Speed. As consumers, we place varying levels of importance on those three components for every purchasing decision we make.

When shopping for a mortgage, whether online or in the "real world," it is important to understand the differences and similarities that exist between the two. Where can you find the best price? Is there a difference in quality? Who can deliver an approval and close the loan in the shortest amount of time? Where will you receive the mix of price, quality and speed that is right for you?

Price

When introduced, the basic concept behind most online mortgage lending was to replace the loan originator with technology and thereby eliminate the commission that would otherwise be paid to the loan originator. The Internet allowed customers to input their own application information, and automated underwriting (computer based underwriting technologies introduced by Fannie Mae and Freddie Mac) allowed consumers to receive decisions without the need for a loan originator.

The idea sounded good and a lot of people bought into it - literally - by buying up stock in online lending companies. But virtually every online lending model has failed due to some common problems.

Consumers discovered that most online mortgage applications required far more time and effort to complete than the "20 minutes" commonly described by online lenders. Frequent disconnects and slow page loading made applying for a mortgage online a frustrating experience, especially for consumers using slower dial-up Internet connections.

Online lenders discovered that of the few completed applications actually received, most could not be approved "automatically" using automated underwriting. The reason was that automated underwriting systems can only "approve" an applicant when there are virtually no issues of concern with the borrowers' credit, income, debt-to-income ratios, the loan amount, or the appraised value.

The fact is that most of us need the help of a professional loan originator. Self-employed borrowers generally need to document income in ways that salaried borrowers do not. Those who might have experienced a divorce or other legal settlement are often required to document the specific terms of that proceeding. Borrowers who have less than perfect credit generally need to address the specifics of those issues.

Online lenders discovered the reality of these problems at about the same time that Wall Street began to question the wisdom of billion dollar market caps for companies that had never shown a profit. As online lenders scrambled to hire experienced personnel to help customers through the lending process, Wall Street investment dollars began to dry up.

Online lenders were left in a jamb. The flow of investment dollars slowed to a trickle. Experienced personnel required higher wages. Higher wages drove up their price. As their prices rose, the number of applications decreased. Today, several leading online mortgage lenders have gone out of business or have been acquired by more traditional business entities for pennies on the dollar.

Consumers also discovered "creative" pricing from online lenders. It is a common practice for online lenders to display very low interest rates on their respective home pages. In order to display those rates, online lenders generally use uncommon assumptions for the loan amount, points paid, and other data in order to achieve those low rates. When a consumer takes the time to input their actual loan needs, the low rates from the home pages usually disappear - or are more adequately disclosed as to the necessity of points being paid in order to buy down the rate.

There is also very little standardization between online lenders as to how fees and other costs are displayed. Far too often, consumers become focused on the interest rate while ignoring more costly factors.

Quality

As the "end product" of a mortgage loan is money, the consideration of "quality" becomes more of service rather than product. When comparing the service you can expect from an online lender and a "real world" lender, one might consider the role of the loan originator.

A "real world" loan originator will generally complete the loan application for you. Virtually every loan originator has access to an automated underwriting system - either through their own operation or that of a wholesale lender with whom they work. The initial contact with a loan originator can now be done by telephone and may last only a few minutes. Automated underwriting allows loan originators to take far less information up front and then reply to the borrower as to what documentation will be required to approve the loan. Automated underwriting has reduced the application process from an hour-long, face to face meeting requiring a lot of preparation, to a simple phone call.

In the "real world," a loan originator will sit down with you and discuss your specific lending needs. How long do you intend to own the home? What type of income(s) do you have? What credit challenges might you have? Would it work better for your to document your income or to select a loan product that does not require such documentation? How much money do you want to invest up front? Is is wise to put that money into your mortgage loan? The list of questions can seem endless and a professional loan originator can best help you understand your options and make the right decisions... for you.

Another question to consider is where you might turn should there be a problem before, during or after the loan closing. If a problem occurs and you have done business with a "real world" lender, you can generally meet with your loan originator to discuss the problem. However, should a problem occur when doing business with an online lender - especially an out of- state entity - you might quickly find yourself alone in dealing with the problem.

With the realities of Price (as described above), borrowers should carefully consider why they would do more work to get a mortgage loan when there is generally no cost savings. If price is equal -or even close - why take on the time and responsibility to act on your own, rather than rely on the expertise of a professional loan originator?

Speed

By definition, the Internet is a technology rich environment. This simple fact leads many borrowers to assume that an online lender can deliver a loan faster than can a "real world" lender. That is simply not true. In fact, the opposite is generally more accurate.

Today, you can call a "real world" loan originator who has immediate access to automated underwriting, and generally get an answer within hours - if not minutes. If everything is "perfect", the answer will likely be a credit decision. If not, the loan originator will generally be able to tell you exactly what documentation would be required to process the loan application. That way, you won't waste time gathering unnecessary information and documentation. Either way, you will have direct and immediate contact with your loan originator.

Given the same circumstances with an online lender, you will share similar communication by mail, email, voice over IP (Internet telephone), private chat session, standard telephone, or overnight delivery. While communicating with an online lender can be similar if not exactly the same as with a "real world" lender, it does serve to dispel the illusion that Internet technology has simplified the mortgage application and approval process. Almost inevitably, you will spend more time online getting to this stage of the process than you would working with a "real world" lender - and you generally won't save any money doing so.

Conclusion

There is a lot to be said for the convenience of being able to apply for a mortgage from anywhere at any time. Online lenders offer that convenience. However, due to the upward pressure on online pricing, limited service capabilities due to distance, and a myth of speed, obtaining a mortgage online offers virtually no advantage over a "real world" lender.

We have invested time and money in developing our online lending systems. We understand the same or similar lessons regarding the comparisons we've made here. We have learned to use the Internet as a convenient alternative business gateway for customers who prefer web based communications.

We strongly encourage you to use all the resources available to you in order to make the best financing decisions for you. Mortgage loans are not "one size fits all" and understanding the choices available to you will help ensure your peace of mind for years to come.

Use the Internet to gather comparative information and to learn about the mortgage process. Use online technologies to whatever degree you feel comfortable. But, do so with the understanding that "online" doesn't necessarily equate to "faster, better, or cheaper."