Have you heard of peer-to-peer (P2P) lending? It is a novel way to access credit in America that allows ordinary individuals to borrow money from one another without an intermediary. A P2P platform acts as a matchmaker, erasing geographical barriers and promoting convenience.
P2P lending is unfamiliar with many people in Massachusetts, but it is estimated to be a $180-billion industry now. After revolutionizing the personal loan space, it has been expanding to mortgage territory of late.
Nevertheless, a group of P2P lenders may still be no match to any traditional mortgage company here in Boston, Cambridge, Worcester, or Springfield. Despite promising lower interest rates and being more accommodating to poor-credit borrowers, P2P lenders are not for most homebuyers. Below are the top reasons why.
Extended Waiting Time
It is not uncommon for a P2P mortgage loan application to take forever. The average closing time is 30 days; if you have questionable credit, you may wait a lengthier period. Unlike established mortgage lenders, P2P ones do not have all of the resources to carry out a thorough vetting process immediately available.
Although the entire application experience happens online, lenders can rely only on documents and credit reports. The lack of face-to-face interaction rules out the chance of reading non-verbal cues, like body language, which can be critical in making credit-related decisions.
Generally, the lower your FICO scores are, the more time it may take for lenders to approve or reject your loan. You may eventually get the nod, but a faster closer may snag your prospective house off you.
Stiff Late Payment Penalty
P2P mortgage lenders practically have no overhead. These creditors contend with less overhead, for they do not maintain a brick-and-mortar request. Combine the money you can save on reduced closing costs and interest payments, and you will see how affordable and manage a P2P mortgage loan can be.
However, the pain to your pocket comes when you miss a payment. Being past due is something P2P lenders hate a lot so that you may be slapped with super high fees as punishment. These costs can be big enough to offset your primary financial gains, which motivated you to sign off the final papers.
Unwanted Family Friction
P2P mortgage platforms are different, and one of them helps facilitate loan applications among loved ones. The intention is good, but encouraging family members to borrow and lend out a serious amount of money to another one is not the brightest idea.
Parents normally provide the necessary financial push to help their children get into the property market more easily. But there is a reason why they often give donations or monetary gifts, not extend credit. Delinquency may lead to drama and distrust among loved ones, so it is better not to get your relatives involved as much as possible.
Some borrowers use P2P lending to get their hands on adequate funds to address a typical mortgage company’s loan-to-value ratio requirement. Obviously, this practice is ill-advised, for the money should come from allowable cash reserves.
Turning debt into down payment will actually make you a much riskier customer. It may also cause your mortgage application’s denial. Even worse, a P2P lender may agree to give you the cash you ask despite its intended purpose is inappropriate.
P2P mortgage lending is rather new, and nobody, even veteran industry observers, could tell what might happen in case it fails. Taking out a home loan the traditional way for now, and consider refinancing it through a P2P lender later on when the level of uncertainty and risk is no longer that high.