What is mortgage loan origination?
Key takeaways
- Mortgage origination is the process through which the lender creates your loan.
- Steps in the mortgage origination process include getting preapproval, applying for the loan, waiting for loan processing and underwriting and attending closing day.
- Many lenders charge a fee for originating a mortgage, which typically costs between 0.5 percent and 1 percent of the loan amount.
When you’re thinking about applying for a mortgage to buy a house, you’re going to see a lot of terms you may have never seen before, including “mortgage loan origination.” Here’s what you need to know to understand the loan origination process.
What is mortgage loan origination?
Mortgage loan origination is the process of your loan being established. When you formally apply for a mortgage, the lender or loan officer “originates,” or initiates the loan (or, to be more precise, considering your request for one).
Initiating a mortgage typically comes with a fee, known as the mortgage origination fee, often equal to 0.5 percent to 1 percent of the loan principal. This fee might be as high as 2 percent if you’re a riskier borrower. The fee covers the time and cost of the lender reviewing and processing your application.
Why is mortgage loan origination significant?
Documents required to begin the mortgage loan origination process
As the lender originates your mortgage, be prepared to provide:
- Proof of income, including tax returns, W-2s and 1099s
- Proof of assets and expenses, including bank and other account or brokerage statements,
- Photo identification (for all borrowers)
You might need to provide additional documents depending on which type of loan you apply for. For a VA loan, for example, you’ll need proof of military affiliation; for a USDA loan, you’ll need information about the property’s location. If you have a cosigner, you’ll need to provide information about their finances as well.
Steps in the mortgage loan origination process
The mortgage loan origination process happens in stages, and typically takes between 30 and 60 days to complete. Origination speed varies depending on the lender, mortgage type and applicant’s credit. Generally, prospective homeowners can expect the following steps in the process.
1. Preapproval
Most borrowers will request preapproval from a lender as the first step in the loan origination process. A preapproval isn’t a firm commitment to lend, but it does show how much you’re likely to get if you meet all of the underwriting requirements and your financial circumstances don’t change substantially between the preapproval and the actual closing on the home.
2. Loan application
Along with (or after) preapproval, you’ll have to complete a formal application for the specific loan type you’re after, which requires a thorough vetting of your finances and the property you’re buying. In addition to all the information you submitted for preapproval, you’ll need to share:
- Any debt you have, like student loans and credit cards
- Your work history and income
- Assets such as bank accounts, stocks, bonds and retirement accounts
- The size of a down payment you expect to pay, and where it is coming from (such as a gift, inheritance or savings)
- An appraisal of the property you’re purchasing
Once you submit the application, you’ll receive a loan estimate, a document detailing all the estimated costs of the loan you applied for. Lenders quote these costs upfront to allow borrowers to compare offers. You’ll receive the loan estimate within three days of applying, though in some cases, you may be provided with an immediate estimate.
3. Loan processing and underwriting
During loan processing and underwriting, the lender and underwriters assess your information, sometimes called your risk profile, to see how much of a mortgage you can handle and pay back on time. The lender evaluates information either through a software program or manually — or sometimes both — to decide about loaning you a mortgage. At this time, the lender can approve or deny the loan, or ask for more information — that is, approve you conditionally. Don’t be surprised if you do get a request for more information: It’s very common.
4. Closing
The final step is closing, which typically occurs in person. Before that happens, you’ll receive a closing disclosure with a full outline of your closing costs and fees. Those fees fall into three categories:
- Those that may not change between the application estimate and your final closing figure
- Those that may go up to 10 percent
- Those that may go up without limit under special circumstances
If allowable changes occur, a revised loan estimate will be provided.
On the actual closing day, you’ll sign paperwork agreeing to the loan terms and the transfer of the property and get the keys to your new home. You’ll also be responsible for paying closing costs at this time, which includes the origination fee if your lender charges one. There might be other fees, as well, such as an underwriting fee or documentation preparation fee and title insurance and attorney fees. Be prepared to pay for those costs with a cashier’s check or a wire transfer — personal checks are typically not accepted.
You can negotiate closing costs in several ways. You may ask your lender for a discount, or for the seller to pitch in. You may also apply to roll the costs into your loan, which may save you money upfront, but can cost you more over the life of the loan.
How to prepare for the loan origination process
The mortgage application process can be nuanced and complex, but there are a few steps you can follow as you prepare to move forward:
- Check your credit. Your credit score will lay the foundation for your mortgage application. Before you begin your application, check your credit report to make sure there aren’t any errors, such as someone taking out a loan in your name or a past-due bill that went to collections.
- Improve your credit score. While you’re at it, take some steps to boost your credit score. The higher your score is, the lower your mortgage rate will be — saving you a lot of money over the loan term.
- Know what kind of loan you want to apply for. Know the differences between mortgage types and which one fits your finances and situation, especially as it pertains to where you are in your life. For example, how likely are you to remain in the home five or 10 years from now? If you’re not planning to stay in the home for a long time, an adjustable-rate mortgage might be able to save you some money.
- Be ready to shop around. Talk to at least three mortgage lenders, ideally starting with your own bank to see what kind of relationship programs it offers. Ask your friends, family and real estate agent which lenders they recommend.
- Do the math between upfront fees and long-term costs. While avoiding an origination fee in your closing costs is appealing, make sure you’re considering the big picture with what you’ll pay in interest each month and over the course of the loan. As you review offers, use Bankrate’s mortgage calculator to see how different interest rates impact your budget.
