Loan origination is the qualification and verification process that begins a new loan. It starts with submitting documents for pre-qualification, which are analyzed by the banker. A loan is fully originated at closing or when the loan is fully in effect.
Definition and Examples of Loan Origination
Loan origination is most generally the start of a loan, but it requires a legal and standardized process. Loan origination standards ensure that loans are issued in ways that aren’t too risky, with many rules and requirements coming from regulations published in the wake of the housing crisis in 2008. The Federal Deposit Insurance Corporation (FDIC) is involved in standards for originating loans as well.
Loan origination can be a fairly rapid process for smaller loans or loans that are secured, such as many car loans. For larger loans like mortgage loans, there is additional paperwork, and the process may take multiple days or weeks before the financing is fully available to the borrower.
How Does Loan Origination Work?
The loan origination process begins with an applicant submitting documentation and data to the lender. This information may be less comprehensive for a small secured loan versus a large loan, but in both cases, credit history, income and assets, and information about what the loan will be used for will all be taken into account.
Most lenders will then take all the required documentation and input the key data into an automated underwriting software product or an underwriter will manually determine exactly the loan limits for which the borrower qualifies.
The representative of the lender will discuss potential terms and interest rates with the borrower, since they may qualify for a different rate for a longer-term loan, or if the loan is a fixed-rate versus an adjustable-rate. If the terms are acceptable, they can agree to move forward, originating the loan.
All this work is compensated in the form of a fee that is included in the loan. For home mortgages, a typical mortgage origination fee is between 0.5% to 1% of the loan amount.
You will know the amount of your origination fee ahead of time as each lender must include it in your loan estimate. Origination fees can generally only increase under certain circumstances.
What It Means for First-Time Homebuyers
First-time homebuyers and others who worry they are on the cusp of qualifying for a mortgage can still have loans originated even if they don’t initially qualify for a conventional loan.
Originating a loan with a special circumstance may require additional documentation. Once you submit these documents to your loan officer, they’ll work with the underwriting team to determine if there’s a loan product that is a fit for you.
Requirements for Loan Origination
While there may be a variety of other paperwork needed depending on the loan product being originated, many lenders will use the following to begin the process in earnest:
- Tax returns and other proof of income like W2s and 1099s
- Bank statements and other proof of assets and expenses
- Credit history
- Photo ID for identity verification
- Information about co-signers, if applicable
If you qualify for a particular kind of loan, there may be additional documents, such as proof of military affiliation for a VA loan or information about the property’s location in the case of USDA loans.
- Loan origination is more than just the moment a loan is in effect. It’s the whole process of applying, reviewing documentation, and agreeing to start a loan.
- The lender begins the work of loan origination once you’ve submitted the key documents related to your qualifications and level of creditworthiness.
- Many loans are issued because of automatic underwriting software, but human underwriters can also review documents and decide whether the documents fit the bank’s requirements, as well as the legal standards for originating a loan.