The following was produced in partnership with Better Mortgage. Better is rebuilding the old mortgage process and improving access to home finance for a new generation of Americans.
As partner at a New York firm that managed billions of dollars in credit assets, few people knew the ins and outs of mortgage investing better than Vishal Garg. But in 2012, he suddenly found himself looking at the residential loan industry from an entirely different vantage point: as a first-time homebuyer.
With a son heading to preschool and a second child on the way, Garg and his wife decided to trade in their modest apartment for a more permanent address. They thought they found the solution in a charming home on Manhattan’s East Side.
That’s when things quickly turned sour. “The process of getting a mortgage was terrible,” he recalls.
Garg entered the couple’s personal information into a mortgage comparison website, which resulted in a flood of calls from lenders he’d never heard of before. They hoped working with a big bank would lead to a better outcome. But instead, they endured a four-week pre-approval followed by even more delays processing the loan. In the meantime, the seller decided to accept a smaller, all-cash offer.
Reinventing the Mortgage
Garg started doing some research to find out if his experience was an anomaly. Instead, he came across one lender after another that was still using paper and manual processing to approve loans. Finding loan consultants who could work around the schedule of busy professional proved equally elusive. “The mortgage industry operates as if the internet was never invented,” says Garg.
He eventually left the asset management firm to create a mortgage company that embraced technology to make sure that people who need to finance homes, don’t lose the opportunity to own one. Better was born.
“I thought maybe I could help a generation of Americans access the benefits of home ownership by making it more affordable, more accessible and more intelligent,” he says.
In 2015, the company purchased a small California bank that gave Garg and his team access to low-cost financing. Everything about the way it handled mortgages, however, was about to change. Replacing the old paper-based system was an online application process and the ability to perform pre-approvals in as little as three minutes.
Better also did away with the commission-based system that rewards loan officers for putting customers into big mortgages. Thanks to the web-based application system, its loan consultants could focus on providing customer care, without the potential conflicts of interest.
From a size perspective, giant banks and mortgage companies still dominate the $13 trillion residential mortgage industry. But Better, which now originates loans in 14 states, is clearly finding a fan base. The New York City-based lender increased its customer base by roughly 400 percent year-over-year in 2017 and was the third fastest online lender to reach $1 billion in funded loans in 2018.
Catering to First-Time Buyers
It isn’t purely convenience that’s driving homebuyers to Better, however. The company also eliminates loan origination fees and has saved their borrowers an average of $3,557 in transaction costs alone. “No one in the mortgage industry has ever had that,” Garg says.
Compared to some major lenders, he says, Better’s rates are as much as 1 percent lower. So a homeowner with a $300,000 mortgage could save up to $3,000 a year.
Part of the reason Better is able to achieve these rates is their novel approach to selling mortgages on the secondary market. Having hired chief technology officer Erik Bernhardsson — chief architect of Spotify’s music-preference engine — the company built an algorithm that instantly pairs investors with loans that meet their buying criteria. “By doing that, we’re able to generate cost efficiencies that we can share with the consumer to make their rates lower,” Garg says,
Garg also notes the company’s customer-centric approach is particularly appealing to young first-time homebuyers, who are used to shopping on Amazon or snagging an Uber right from their phone. By contrast, the mortgage sector can seem out of step.
In order to attract Millennial customers, Better is trying to tear down some of the traditional hurdles that first-time homebuyers face. For example, it offers qualified applicants without a lot of savings the ability to buy with as little as 3% down.
Better is also helping its customers make more competitive bids, even when they don’t have much cash to put down at closing. By helping customers understand ahead of time how much they can borrow and how much the home is worth — it uses a proprietary process to make a “pre-offer appraisal” — buyers can sometimes waive contingencies and make their offer more attractive to sellers.
Garg believes those innovations will help buyers in their 20s and 30s avoid the same frustrations he had to endure. “They’re expecting a more modern mortgage experience than the one that’s available to them,” he says.