NEW YORK (MainStreet) — Traditional bank mortgages are losing ground to nonbank lenders, especially in cities with a hot housing market.

Seth James Ellis, 33, and his husband, Jared Ellis, 32, along with a third investor turned to Social Finance, Inc., a San Francisco-based online lender, for a jumbo mortgage to purchase a $1.1 million, three-bedroom duplex in Berkeley, Calif.

”We didn't expect to get this house, " said Seth James Ellis, who works as a fundraiser in the Bay Area. "The emotional feeling in this market is that you're never going to get the house that you want, because someone is going to come in with a higher cash offer.”

Non-traditional, non-bank lenders, such as SoFi as the online lender is commonly called, offer less conventional underwriting for residential mortgages and typically a shorter period to close because of the design of the loans, mortgage experts say.

”Your offer is as good as a cash offer in terms of the speed, and that was very important to us as a competitive advantages," Ellis said in terms beating out other buyers in a sellers' market.

The Ellis couple and their third-party investor closed on their Bay Area home within 15 days — a much shorter timeframe than the typical 30 to 45 days undertaken by traditional bank lenders.

”Traditional services are often slow and unresponsive and they cause a problem for some borrowers," said Gregory Garrabrants, CEO and president of Bank of Internet USA (BofI), who adds a slow response time could cause borrowers to lose the ability to purchase a particular home.

Smaller and nonbank lenders are often not subject to the same federal safety and oversight that apply to larger traditional banks, such as Citigroup (C) or Wells Fargo (WFC) , according to the Federal Housing Financial Association.

The FHFA reports that nonbank lenders have increased their share of overall mortgage originations in recent years. Inside Mortgage Finance, a publication that tracks mortgage data, estimates that nonbank lenders accounted for 37.7% of mortgage originations in the first quarter of 2014 -- an uptick of 26% from the same quarter in the previous year.

Only five of the top 20 mortgage originators in 2006 are still active in today's mortgage market, according to a recent Fannie Mae report.

Online lenders are changing the mortgage experience in the rapid sharing of information on mobile and online, said Bob Walters, chief economist at Detroit-based lender Quicken Loans.

”These lenders are not bound by geography or a brick-and-mortar network," Walters said. "[They] look to gain the broad base that the internet brings," Walters said.

Social Finance, Inc.

Fast-growing SoFi now holds a $4 billion valuation inside its four-year lending history with a sizable investment from Softbank Group Corp., the same early investor that backed e-commerce giant Alibaba BABA. The San Francisco-based lender launched initially as a "fintech" service, offering to refinance student loanswith its unique underwriting approach. Last year, SoFi financed over $1.2 billion in loans.

The California lender has since expanding into other online-based financial products, including the jumbo mortgage market that it entered in June 2014. The company says its typical mortgage loan averages $900,000 in size.

“In many ways we are applying our unique underwriting approach from [student loan refinancing] to mortgages with the exception that we are not asking for the applicant's age, nor are we looking at degree type," said Aimee Young, chief marketing office at SoFi.

The draw, especially for customers who live in expensive housing markets, is SoFi's 10% down payment on jumbo loans with no origination fees and no private mortgage insurance, Young said.

With enticing terms and conditions, the process of being approved for a SoFi mortgage is fairly selective in choosing borrowers.

“We were told that we had a really 'pretty file,'" Ellis said. "It's such a quaint way of describing our finance picture. All of us had credit scores in the high 700s and had been employed for a long time. It was clear to us in the process that it's not a lender for everyone.”

Young says the company is licensed in 24 states with its mortgage product and plans to expand to New York and Massachusetts in the next year.

Online Mortgage Lenders versus Traditional Banks

Banks are facing formidable competition from nonbank lenders, such as SoFi, industry experts say. Roughly 20% of the mortgage loans in the U.S. are alternative lenders, according to the Consumer Financial Protection Bureau, which tracks mortgage products.

Bank of America (BAC) dropped its third-place rank in mortgage share in home loan dollar volume last year to online lender Quicken Loans — a company that wasn't even listed as a top 25 mortgage lender eight years ago, according to Inside Mortgage Finance. The publication ranked Wells Fargo as the top mortgage lender in 2014 followed by JPMorgan Chase (JPM) .

”We are now 6% of the market place ourselves as the biggest online mortgage lender," said Walters, the Quicken Loan chief economist. "All our loans are processed and underwritten in one place and that allows us to build out technology and efficiency that are impossible to build out on a distributed branch network.”

And Quicken is not the only online lender gaining market share. BofI, which largely lends in California, has grown its residential mortgage loans for single-family homes. The company grew by 476% in five years from $500 million in 2011 to $2.9 billion in 2015, according to the company's August 26 filing to the Securities and Exchange Commission.

BofI, primarily lends jumbo loans and is very active in Southern California as well as New York, Chicago and San Francisco, focusing on the larger markets, said Garrabrants, the BofI CEO.

“We have very short underwriting term times and that's a plus for our purchase oriented borrowers -- we give quick answers," Garrabrants said. "In a really hot market, that's important."

The Ellis couple needed quick responses to purchase a home in San Francisco where sales are strong and prices are rising.

”If it weren't so competitive in this market and we would have more flexibility to go with a traditional lender," said Ellis, who says an online lender beat out taking a bank mortgage based on terms and price.

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