So you’re finally ready to purchase a home. You’ve been saving up and looking at listings, and you know what you want in a property. Now you’re ready to move on to the next steps and make your home buying dream a reality. You’re ready for the loan origination process.
Unless you’re buying a home with cash, you can’t get a mortgage without going through the loan origination process.
Loan origination is an inescapable part of obtaining a loan. It’s when a borrower progresses from saving, planning and wishing to action. We’ll guide you through the home loan origination process so you can prepare for every step of the process.
What Is Loan Origination?
Loan origination is the process of getting a loan approved and funded. It’s the entire process of applying for and acquiring a loan, including everything from processing the application to distributing the funds.
It often starts with a preapproval, then it moves on to underwriting and ends with the disbursal of funds to the seller. A loan is fully “originated” when the mortgage closes.
Loan origination isn’t exclusive to mortgages. It applies to all loans. The mortgage loan origination process may be longer and more complicated than it is with other loans (like personal or auto loans) because the borrower typically borrows a much more substantial sum.
Let’s take a closer look at the costs associated with mortgage loan origination.
Loan origination fee
The loan origination fee compensates the lender for processing a loan application.
The fee covers many aspects of the loan review process, including collecting and filling out paperwork, scheduling appointments and underwriting.
Some lenders break out the underwriting fee from the loan origination fee, but other lenders bundle everything under the loan origination fee.
The loan origination fee is 0.5% – 1% of the mortgage. If you took out a $200,000 mortgage, your loan origination fee would fall between $1,000 and $2,000.
Your loan provider will include your origination fee in the Loan Estimate form they’re required to provide once you’ve been preapproved.
Loan origination fees are typically part of your closing costs, which are paid when you close on a home. Closing costs must be paid in full (or rolled into the loan) for the mortgage to be finalized.
Underwriters verify income, assets, debts and credit history to approve or deny a loan. Your finances are meticulously analyzed to determine whether you can afford the loan.
Sometimes you might see an underwriting fee shown as a separate fee from the loan origination fee. It usually costs between $500 and $1,000.
But, if a lender charges you a high loan origination fee (over $1,000 per $100,000 borrowed) and an underwriting fee that’s closer to $1,000, you may want to see if you can negotiate one or both down, or ask the lender to consolidate both fees into a single lower fee.
How Does the Loan Origination Process Work?
You begin the loan origination process as soon as you reach out to a bank or lender for mortgage preapproval. If you’re at the point where you’re ready to start working with a lender, here’s what you can expect to happen:
The preapproval stage is optional, but it can offer buyers an advantage in hot real estate markets. At this stage, the borrower submits financial paperwork to the lender (pay stubs and income tax returns), and the lender runs a credit check on the borrower.
Based on this information, the lender will provide a preapproval that estimates how much the borrower can lend. (FYI: Preapproval doesn’t guarantee final loan approval.)
If you don’t get preapproved, your loan origination process begins after your purchase offer has been accepted, and you’ve completed a mortgage loan application.
To get preapproved, you fill out a mortgage loan application. Once you’ve gotten a purchase offer accepted, you’ll expand on that application. The application will require details beyond those you provided during preapproval, including property-specific details.
Underwriting and loan processing
After applying, your application is carefully reviewed by an underwriter to confirm that its details are correct. The underwriter performs a microscopic review of your finances to determine how much money you can be approved for.
Mortgage underwriting includes a professional appraisal of the house you want to buy. A lender requests an appraisal to make sure the value of the home lines up with the amount you want to borrow. A low appraisal might make the lender unable to offer you a loan.
Once your loan is approved, you’ll know how much you’ve been approved to borrow and at what interest rate and terms. During closing, you sign paperwork confirming that you agree with the loan’s terms and repayment schedule.
You’ll be given a breakdown of your closing costs (including the loan origination fees) before the closing day, and you’ll pay them at closing. After you sign the paperwork, the seller gets the money and the home is yours.
You may be able to negotiate your mortgage loan origination fees down. This can potentially save you money at closing.
What Are the Requirements for Loan Origination?
The loan origination process can be complex and requires a lot of documentation. Throughout the process, you may be asked for more paperwork to support the information you’ve supplied. The process typically begins with these documents:
- 2 years’ worth of tax returns and other proof of income (W-2s and 1099s)
- Credit check
- Bank statements
- Proof of assets (bank accounts, investments, retirement funds)
- Status of current debts (student loans, credit card balances, car loans)
- Information on co-signers (if you have any)
If you’re applying for a government-backed loan – like a Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA) loan – you may need to provide paperwork showing that you and the home you want meet the loan’s specific eligibility requirements.
What Questions Should I Be Asking My Lender?
Your lender should provide you with a Loan Estimate form that will answer many of your home buying questions, but don’t be afraid to ask your lender questions at each stage of the journey to homeownership. Some of the questions you may want to ask are:
- What interest rate am I approved for? For how long is my interest rate locked in?
- What loan terms and types do you offer?
- What is my estimated loan amount?
- What size down payment do you think I need?
- Will I have to pay for private mortgage insurance (PMI)?
- What are my estimated closing costs?
- How long will it take to process my loan application?
- Do you use an in-house underwriter or do you outsource underwriting?
- Do you know of any down payment assistance programs I can work with? How will working with one of these programs impact my application?
- Is there a mortgage prepayment penalty?
Your Home Buying Story Starts With the Origination Process
The lender will walk you through the process, detailing what documentation you’ll have to provide, costs you’ll incur and the estimated timeline. Mortgage preapproval is an optional – but highly recommended – first step. A mortgage preapproval can give you an advantage when you’re putting in offers on homes because it shows buyers that you’ve already started the borrowing process. It’s like a head start. And considering how long the home buying process can be, wouldn’t you want a head start?