We recently got a question about whether or not it would be possible to use a website like GoFundMe or another personal fundraising website to help finance your mortgage. While I don’t think this is a good idea, as I can’t think of any compelling reasons that someone would want to donate money to finance the mortgage of your house, when they have to pay their own bills, I do think that you could use a creative finance tool like peer to peer lending to finance your mortgage.
Thanks to the growth of the peer to peer lending industry you no longer have to turn to banks to finance your mortgage. Peer to peer lending sites like Lending Club and Prosper have funded billions of dollars in loans for things ranging from debt consolidation, business, and medical expenses. Now more of these platforms are moving into previously untapped markets like real estate. The International Business Times states that:
“Free from the brick-and-mortar costs and regulatory burdens faced by ordinary banks, P2P lending promises lower rates for borrowers and attractive yields for investors. Nonexistent until 2005, the P2P market has roughly doubled each year, and will reach an estimated $40 billion in 2016, comprising personal loans, commercial loans, mortgages and student debt.”
Until fairly recently, most of platforms that focused on real estate specifically dealt almost exclusively with commercial properties. In 2014 Fundrise, an equity crowdfunding platform for real estate, expanded their service to include single family homes after experiencing some success with residential projects (including a $1M investment in the Hamptons!)
More peer to peer lending platforms are being created to deal specifically with mortgages and real estate, including LendInvest and Money360. Here are some of the advantages and risks that are associated with peer to peer lending for mortgages:
Advantages
Turning to a peer to peer lending platform to finance your mortgage has different advantages that depend on the person. According to a Mortgage Business article the chief executive of Ratesetter, Mr. Foggo, says that:
“Peer-to-peer lending for credit-worthy borrowers can provide more cost-effective personal loans, so that may be where peer-to-peer lending can play a meaningful role early on … If they’ve got a good credit history, it’s going to be a very competitive loan, so they effectively save themselves quite a lot of money.”
The advantages of choosing a peer to peer lending service to fund your mortgage includes an easy online sign up and lower interest rates (for those with good credit). With some platforms you can get approved even if you have been refused by a bank.
For lenders, investing money through peer to peer services may result in a higher return on investment compared to the low interest rates currently being offered by banks. Peer to peer lending also gives investors a chance to reduce the risks associated with borrowers possibly defaulting by making smaller investments on more mortgages.
The platforms themselves benefit from this huge market because with each loan taken out comes an origination fee that is included in the interest rate (Lending Club’s is from 1 to 5%). The real estate market is a logical next step for peer to peer lending, with many platforms looking to expand their services to this area. Back in October, 2014 CNBC wrote that:
“San Francisco-based lender SoFi (short for “Social Finance”) has been quietly testing the waters to underwrite new mortgages for existing customers living in states like California, New Jersey, North Carolina and Texas. After beta testing more than 100 mortgages, SoFi is opening the platform more broadly.”
The generation of millennials that SoFi’s student loans appealed to are now looking into house acquisition. SoFi believes in peer to peer lending as a useful alternative to traditional banking, and adds that they mainly deal with borrowers who have six figure incomes and very low chances of defaulting.
Risks
Of course peer to peer lending for mortgages does include some potential risks to all parties involved. Unlike traditional mortgages, these loans are often short-term and have less payment flexibility, which can make it hard for borrowers to make their payments should something unexpected occur. Others see more of the risks being taken by the platforms and lenders themselves. A NewScientist post warns:
“If P2P firms aren’t transparent about the risks facing investors, that could create a situation in which expected returns fail to materialize. Some also worry that the credit score demands on P2P borrowers might be relaxed to encourage market growth.”
It will be important that platforms are realistic about what their services can really do. How easy it is to get accepted as a borrower, or grow your investments as a lender? Some regulators wonder if this business model is sustainable or if it might disrupt the market in a harmful way.
Conclusion
Using a peer to peer lending platform for your mortgage can lead to great savings, but that is mainly based on your ability to make payments in the future. Services that currently offer loans for mortgages are focusing on borrowers with good credit history and high incomes at the moment, although it is possible that this could change in the future to encourage market growth.
Platforms and lenders might be at risk of defaulted loans becoming more common as the market fills up and standards on the platforms are lowered, although right now the business model seems to be working. So far these sites have proven that they are willing to work with regulators to offer high quality services to borrowers and investors. Lending Club’s successful IPO last year is one thing that helped investors and the general public see the potential in peer to peer lending.
