Unless you’ve already made your millions by investing in Bitcoin or cashing out a dot-com startup, you are like the rest of us and taking out a loan to buy your house. More specifically, that means you are likely applying through one of the big banks, submitting all manner of documentation detailing your employment history, credit worthiness and marital status. If you’re smart, you may be shopping around with multiple banks and brokers so you can eek out that extra 1/8 of a percentage point on your 30-year home loan. But doing so just further increases the mind-numbing paperwork and number of parties who are privy to every financial secret of your life. All to serve your quest to get pre-approved.
A recent survey found that almost nothing is more stressful than buying a home, and the reasons are mostly tied to the awful and costly lending process.
Paper, paper, paper
In a world that grows more digital by the second, the mortgage process is almost quaintly paper-based. With regulations increasing the volume of documents required, loan files can easily exceed 500 pages for a single transaction. Homebuyers need to exhibit Herculean patience, as they must gather dozens of financial records and fill out countless forms, then scan or fax them to their lender. In my last home purchase, I had to put up with four rounds of requests for additional information or documentation that I had already sent them. Of course, this amount of back and forth creates delays and lengthens the closing time for the loan, with many transactions taking 40–60 days!
The info flows only one-way
As a would-be homebuyer, you are completely at the mercy of your loan officer as to the state of your loan. Most lenders don’t have any system that provides loan status or updates to borrowers, and the ones that do exist are barely functional. Borrowers are in the dark during the whole process; to get any information they need to rely on calling or emailing their loan officer and hoping for a response. This is a fine way to operate in the 1980’s — one day when I want to show my kids the world I grew up in, I’ll make them apply for a home loan.
High costs on all sides
On average, a lender will charge you ~$10,000 to complete your home loan. Why does it cost you an arm and a leg? The answer is actually very simple — the lender has very high costs, and guess who pays for them... But what is driving the majority of that amount? A large staff executing inefficient and manual processes that are prone to error and fraud. Examples of the repetitive and mindless work performed are things like converting documents into emails, picking up documents and placing them on another person’s desk, collating paper mortgage loan packages by hand multiple times, tracking and submitting forms, and following up on missing or needed information. This is the opposite of value-added work. All these paper-driven inefficiencies that home-buyers have to endure drive up the lenders’ costs considerably.
But why should you care about the banks’ costs? Because they pass their costs on to borrowers, in the form of increased fees but more insidiously, higher interest rates on the loan! With most home loans being sold to another party, lenders are incentivized to hook borrowers on higher interest rate loans — when they do, they’ll receive a Yield Spread Premium (YSP) as a bonus when they sell that loan. Lenders count on YSP to cover their costs of the transaction, and then some. As a home-buyer, you not only tear your hair out due to the lenders’ archaic, paper-fetishistic process, but you also have to pay more because of those same inefficiencies. The bottom line is: you could be getting a lower interest rate, if only the lender had a quicker, automated and lower-cost process.
So what are home-buyers to do? There is some good news. As slow as the home loan market has been to change, there are some lenders out there working on making the process less of a nightmare. Borrowers should target lenders with the most efficient process, not only to reduce their own stress, but also because they’ll likely get the best financial deal. And I’m excited to say that we’re working on something that should bring the home mortgage process into the digital age. We’re going to take paper, time and cost out of the lending process, and believe me, your hairline will thank you.
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I founded Reasi, a home lending startup that brings convenience and cost-efficiency to the home transaction process. If you are buying or selling a home, and want to save money while doing business outside the traditional financial system, Reasi is for you.
Have a question on how blockchain will change the way we fund home purchases, or want to make a suggestion on a future article topic? Please write me at john@reasi.com and I’d be happy to start a conversation. Alternatively, you can follow me on Twitter and LinkedIn.
