SECTOR SPOTLIGHT is a series of in-depth articles on FinTechtris that explores a specific FinTech sector, discussing the industry challenges being addressed, top companies leading the innovation trend for change, and future impact.

FinTech has grown as an unstoppable force within the world of finance impacting multiple areas that have been dominated by traditional banks and legacy institutions. 

An emerging area that is experiencing tremendous customer demand for change is real estate, specifically in solving the critical issue of homeownership.  Plagued by slow, inefficient, and restrictive processes from lending institutions, users are looking for solutions to solve this major financial need.

Tackling Homeownership Head-on

The damage from the Financial Crisis of 2008 to credit worthiness, along with increasing rental rates, and home price appreciation outpacing wage growth has created a deep affordability crisis in the US. 

On top of this crisis, current processes from traditional lenders still operate poorly with customers meeting a mortgage adviser in person to submit applications, under rigid underwriting guidelines.  For borrowers who do qualify with a pre-approval offer, a 45+ day journey awaits them full of continuous documentation requirements to provide loan officers in a broken, friction-filled system. 

The good news is that there are FinTech companies successfully tackling home ownership with improved processes and platforms, and innovative financing options that are converting more tenants to owners. 

Here’s a look at a few leaders in this sector:

Better Mortgage

Founded in 2014, Better Mortgage has become a leading digital mortgage originator that can qualify a prospective borrower (through its app) in a few minutes with stated income figures and a credit inquiry; this pre-qualification can lead to a pre-approval letter (necessary for making offers on listed homes) after submitting required documents, within 24 hours.

The ability to gain an offer letter within a day, without having to make an appointment to see a home loan officer and providing physical copies of lending requirements, is a huge convenience for today’s applicants.

Better Mortgage matches underwritten loans to partner lenders (who include Fannie Mae and top banks in the US) with a pricing guarantee, and origination cost paid by the lender.

Blend

Blend aims to reduce friction for customers and institutions by speeding up the loan approval process through its white-label, cloud-based software platform for an efficient, integrated mortgage experience.

Prospective borrowers apply for mortgages through the banks that already have their trust, while taking advantage of a streamlined process optimized in avoiding painful (and unnecessary) steps — the applications can still start in-person with a mortgage officer or over the phone due to Blend’s omnichannel presence.

Lenders gain intelligent automation with critical tasks in the process, and a centralized view for collaborating among key stakeholders, which adds up to shorter closing times.

The company plans to extend its lineup with other lender offerings (auto and student loans) and products, such as home equity.

Opendoor

OpenDoor is considered an “iBuyer” and helps both existing and prospective homeowners in saving time on the sale or purchase of their home.

For homeowners, OpenDoor acquires the  seller’s property themselves (with a cash offer) in as little as a few days, saving time listing the home or waiting for buyers with standard financing (that may fall through), and the costs in maintenance repairs to get the property ready to sell. 

For prospective buyers, OpenDoor has properties it owns that have “all-day open house” access through their app (6a - 9p daily). 

The platform is built well for families or home-flippers looking to sell and buy in a short time frame.

Unison

Unison takes a different approach in helping out homebuyers by offering an equity investment to cover up to half of the 20% down payment required to avoid private mortgage insurance (PMI), free of interest charges or monthly payments.

Unison participates in market appreciation (or a share of loss in a market downturn) upon the sale of the home, or after the home is paid off (up to 30 years out) — additionally homeowners can buy out Unison’s investment after 3 years.

For existing homeowners, there is an interest-free home equity product that requires no monthly payment, and also pays the company with a similar value appreciation model.

Divvy Homes

Divvy tackles the challenge of home ownership and affordability by offering a modified rent-to-own approach in which buyers put a 2% down payment and pick out the home they’d like to own, at which point the Divvy purchases the property and then rents it out to future borrower. 

Each monthly rent payment includes a 20 - 25% portion that goes into a down payment reserve fund that grows over 3 years, facilitating conventional loan financing for the renter to become an owner. 

The buyer benefits by paying market rent while seamlessly saving towards a down payment for the house they are already living in.  

Divvy essentially is acquiring homeowners with their innovative model, and focuses in on cities and areas in which home ownership makes sense relative to rental rates (currently operating in Atlanta, Cleveland, and Memphis).

Future Outlook

Homeownership challenges in the post-Financial crisis era have put a dent in homebuyers.  Fortunately, FinTech companies have taken the lead in finding solutions towards making the American dream come true.

More innovation is yet to come from these “real estate tech” startups who are using new technology and business models to solve a huge pain point that longstanding lenders and institutions have failed to address. 

The next level of innovation involves data analysis leveraging artificial intelligence for alternative credit scoring models, adding the likelihood of even more future homeowners.

The outlook is limitless for the real estate sector as it continues advancing and making improvements toward creating homeownership opportunities for all prospective buyers.