Digital mortgage start-up Better.com is now worth $550 million following a new investment from Ally Bank

Better

Better.com CEO Vishal Garg

• Ally Bank and Better.com announced a deal last week in which the bank will outsource most of its mortgage operations to the fintech start-up.
• Ally is also investing $20 million in Better, valuing the company at $550 million.
• In addition to capital, the deal provides Better access to billions in loan volume and connects it with a national brand whose reputation is staked on being an ethical, consumer friendly alternative to traditional banks
• Visit Business Insider's homepage for more stories.

On a panel at a consumer finance conference in March, Better.com founder and CEO Vishal Garg gave a nod to the industry trends that have cracked open the mortgage business for start-ups like his.

"A lot of the banks have been getting out of the mortgage industry, and that's great," said Garg, whose company up until this point has offered its home-loan service - which trims preapproval down to mere minutes with the help of machine learning and automation - directly to consumers, rather than selling its tools to banks.

Now, Garg and Better.com are working directly with the banks after inking a deal with online-lender Ally Bank.

As part of the partnership, announced last week, Ally is outsourcing its mortgage operations to Better. Prospective homebuyers will apply and move through the process on a site with an Ally-branded body and the start-up's powerful engine on the inside.

But Ally isn't just getting a spiffy new mortgage platform, it's also buying a larger stake in Better.com.

As part of the deal, Ally is increasing its stake in Better to $20 million as an add-on to the start-up's $75 million series C funding round earlier this year, according to multiple sources familiar with the deal.

The investment values Better, which Garg founded in 2014, at $550 million, the sources said.

Better declined to comment on the terms of deal. An Ally spokeswoman disputed the figures.

Read more: Bitten by regulatory headaches and sagging profits, banks are offloading their home loan businesses to machine-powered start-ups

Ally's brand and 8 million customers may prove more valuable than the additional capital, though.

Better originated $1.3 billion in mortgages in 2018 across 30 states. That's triple what the company did the year before, but it's a drop in the multi-trillion mortgage bucket.

At the March conference, Garg didn't hide his frustration that the business wasn't catching fire quicker customers.

Even though Better offered the lowest mortgage rate, 80% of customers approved on its platform elected to take their business elsewhere, paying 0.5% more on their rate and leaving $1,500 a year on the table, according to Garg's estimates.

"We just need to figure out a way to bridge that trust chasm," Garg said.

The partnership with Ally, which since its post-crisis rebrand has billed itself as the ethical, consumer friendly alternative to traditional banks, could help alleviate that frustration, in addition to providing access to millions of more customers and billions in additional loan volume each year.

Better will start by handling Ally's mortgage business in nine states, roughly 20% of its flow, and aims to ramp up to 100% by the end of the year.

The company said it expects to reach $3 billion of mortgage originations in 2019.

• Read more:
• Bitten by regulatory headaches and sagging profits, banks are offloading their home loan businesses to machine-powered start-ups
• Blend, a startup that's building a 'one tap' mortgage-application tool, is now jumping into the auto-loan market