What is loan origination?

When you are in the process of acquiring a mortgage, your lender will provide you with a whole host of services, known as loan origination.

Pat Howard 1600

Pat Howard

Published May 30, 2019

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KEY TAKEAWAYS

  • Loan origination refers to everything the mortgage company does to get you a mortgage, from prequalification to closing

  • The loan originator helps you process your application

  • You have to pay a loan origination fee as part of your closing costs — typically 1% of your mortgage amount

Before taking out a mortgage on a home, you first need to go through the mortgage process, which includes everything from getting prequalified to the application itself to underwriting. Loan origination, or “origination”, simply refers to the entirety of the services provided by your lender in helping you acquire a mortgage.

Traditionally, loan origination starts with the loan originator — more commonly referred to as a loan officer or mortgage broker. But loan origination has evolved, and many parts of the process — like prequalification, preapproval, and your application — can be done online without an actual broker.

Once you’ve reached the underwriting stage and you’re ready to close on the home, you’ll pay an origination fee as part of your closing costs needed to secure the mortgage. An origination fee is essentially your loan officer’s commission payment for getting you the home loan.

What does a mortgage originator do?

A mortgage originator can refer to a specific individual or an entire mortgage company who the borrower works with to obtain a mortgage. An originator can be an independent mortgage broker or they can work on behalf of the mortgage company that funds the loan.

Applying for a mortgage is a complex and drawn out process, and in order to qualify, you need to submit a number of documents such as your mortgage application, pay stubs, W-2s, and tax forms during the different stages of the process. The mortgage originator is the individual or entity to whom you submit all of those documents for loan processing and underwriting.

One thing to keep in mind is the distinction between an originator working on behalf of a bank and an independent originator. A mortgage banker works for the company who funds you with the loan, while an independent broker acts more as an intermediary between you and the mortgage lenders.

What does loan origination consist of?

Mortgage origination is a multi-step process with a lot of moving parts, from figuring out how much of a loan you’ll likely qualify for to submitting the loan application to underwriting and determining your mortgage interest rate.

A typical loan origination consists of the following steps:

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Prequalification

Prequalification is the first step of mortgage origination, as it gives you a general idea of how much of a loan you’re likely to qualify for. Your loan officer reviews basic financial information -- like your credit score, income, and debts, and gives you an estimate of the mortgage amount you’re likely to qualify for as well as an estimated interest rate. Prequalification can typically be done in person, online, or over the phone.

Learn more about applying for a loan online.

Mortgage application

The mortgage application is the second phase of the origination process. It’s a 10-part application where you indicate everything from the type of mortgage you’re applying for to the information about the property to your financial information. Your mortgage application can be done online as well as in person, but to ensure that the application is correctly filled in and expedite the preapproval process, it may be best to meet with a loan originator.

Documentation

As a prerequisite for underwriting, you need to submit a number of documents — like your W-2, pay stubs, bank statements, and a number of others — to your loan originator to be submitted for underwriting. This part of loan origination can be done in conjunction with the application or after you’ve been preapproved, depending on your lender.

Loan processing

Once you’ve gathered all of your paperwork, your loan officer submits it to underwriting, which is the mortgage company’s way of determining your ability to pay back the loan. Your mortgage terms (like the amount of the loan and your interest rate) are also determined during this stage. The underwriting process has a tendency to drag out, and your loan originator may request additional documents at the underwriters’ request.

Closing

Once you’ve gotten through underwriting and are ready to close on a mortgage, your loan officer schedules a closing date, orders an appraisal of the home, and provides you with a list of conditional approval items — like buying homeowners insurance — that you need to complete ahead of closing.

What’s a loan origination fee?

The loan origination fee is how the lender profits from helping you get the mortgage. When you’re paying your closing costs, your origination fee will likely appear as one or more of the following on your bill: an application fee, mortgage points, processing fee, document preparation fee, or an underwriting fee.

The fee is generally 1% of the total loan amount, so origination fees have a tendency to be rather high. Depending on the mortgage company, you may be able to negotiate the origination fee down to a lower amount.

Keep in mind that some mortgage companies won’t charge you origination fees, but they may simply be charging you a higher interest rate instead. Similarly, a lender who offers competitively low interest rates may be charging you drastically higher origination fees than companies with higher rates.

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