Loans remain an important financial tool that essentially allow you to follow your dreams. Whether you want to buy a house or a car, start a new business, or pay for higher education, loans give you the money you need, when you need it.
If you need a loan, you will likely deal with loan origination at some point. However, loans can pose an intimidating and often confusing challenge for many people. Loan origination in particular may seem daunting as it is an extensive process, but it is a critical step in applying for and receiving a loan. Read ahead to learn why loan origination is such a significant part of the loan process.
What is Loan Origination?
Loan origination refers to the process in which a potential borrower applies for a loan and the processing of that application. Origination involves several steps and generally encompasses everything from the loan application to the eventual disbursal of loan funds (or alternately, the rejection of the application). Origination is required for essentially all types of personal loans and are most common with mortgages and home loans.
During the origination process, you must turn in various forms of documentation and information to the lender to substantiate your income, employment status, and personal finances. This can include:
- Payment history
- Tax returns
- Credit card information
- Bank statements
- Credit reports
Reviewing this information, the lender can determine if you are eligible for a loan, the type of loan you may receive, and the interest rate. The process is extensive and lengthy and involves several steps to not only ensure that all the information is accurate and up to date, but also to give you the fairest interest rates and loan terms for your specific needs.
The Role of Loan Originators
Essentially all of the steps in the origination process go through the loan originator. The loan originator is responsible for managing everything from the application to the granting of the loan. Loan originators can work for lenders or act as independent entities.
It’s important to keep this in mind as originators who work for banks do not always have your best interests at heart. They prioritize the bank’s needs over your own, which often does not benefit you in the end. Independent loan originators are more likely to make you the priority because their business depends on your satisfaction. Independent or outsourced loan originators are more likely to help buyers choose the best type of loan for what they would like to accomplish and can connect you with the lenders that offer the best deals.
If you are looking into hard money loans, you are better off working with independent or outsourced loan originators. Banks and other traditional lenders generally do not make hard money loans due to their potentially high-risk nature.
The first step of the loan origination process is pre-qualification. During this stage, you will meet with the loan officer, who will ask you for some basic data and information regarding your income and the property that you need the loan for. After this meeting, your loan officer may actually have enough information to the determine the type of loan that you best qualify for. These loans generally fall into three different types:
- Fixed-rate loans, which maintain the same interest rate throughout the lifetime of the loan
- Adjustable-rate mortgages, which have interest rates that fluctuate based on an index, similar to trusts and bonds
- Hybrid loans, which combine aspects of interest rates from both fixed-rate and adjustable-rate loans
Most hybrid loans start as fixed-rate loans before transitioning into adjustable-rate loans later on.
If you belong to certain groups, you may be eligible for loans from government entities. For instance, the Federal Housing Administration offers loans to those who meet specific qualifications and are FHA-approved. The Department of Veteran Affairs will offer loans to those currently or formerly in the military as well as their family members. These government loans are unconventional and often make purchasing homes easier for those individuals who qualify. Government loans often come with low or nonexistent down payments and lower qualifying ratios.
During the pre-qualification stage, potential borrowers will also receive lists detailing the forms and documentation they will have to turn in with their application. This varies based on the loan and the lender, but the list can be fairly extensive and include:
- W-2s and other tax forms
- Purchase and sale contracts
- Profit and loss statements for those who are self-employed
- Bank statements
If your loan is for refinancing an existing mortgage, you will also be required to submit your current mortgage statements. The lender can also ask for additional documentation down the line.
Submitting Your Loan Application
After pre-qualification, you fill out your application form and submit the documents that the originator asked for during the pre-qualification stage. Your loan application, or loan file, comprises all of the essential information and documentation that your loan originator requires to make a decision about accepting or declining your loan request.
From there, your loan officer will discuss the different loan options that are available and help you choose the loan that best suits your personal and financial needs. The loan officer will also complete any legally required paperwork on their end. You will also likely work with a loan processor throughout this and the following steps. The loan processor assists the loan officer with various tasks but is also responsible for double-checking applications, verifying the accuracy and clarity of forms, and essentially making sure that you have the best chance at having your loan request accepted.
Screening, Verification, and Negotiations
Once you have completed your application, the lender will screen all of the information, verifying your credit score, income, and financial status. This may involve follow-ups, like contacting your employer or landlord. Screening gives your lender an opportunity to double-check everything. Any information that seems vague can be cleared up, and any errors can be corrected. This is all important to do prior to sending the application to the underwriter. Although you can correct certain errors with the underwriter, the process is more involved and comprises more red tape.
After the screening process, you may be able to negotiate loan terms and interest rates that are more favorable to you. However, this often depends on the lender’s approach and your financial status. Keep in mind that these negotiations involve a give and take. For example, all loan originators take an origination fee, often comprising 0.5 percent to 1 percent of the full loan amount.
This is usually the originator’s main form of compensation for their work, similar to a sales commission. Depending on the loan, you may ask for a lower origination fee, but the lender may ask for a higher interest rate in return. This may be cost-effective if you plan to sell or refinance your property within a few years, but you may otherwise be paying more in the long run.
Filing the Loan
Once the application has been double-checked and all the supporting documentation verified, the lender can finally file the loan. At this point, the loan is entirely out of the borrower’s hands. All of the paperwork that has been submitted is sent to several other parties within the lender’s network, including document processing and automatic underwriting programs for approval. Some files may even be sent to an individual underwriter for manual approval.
After final processing, the lender decides whether to reject or approve the application. If the loan is approved, the loan officer can proceed to schedule closing, appraise the property that will be covered by the loan, request any necessary insurance information, and finally send the loan file to the processor. Even after approval, the loan processor may request additional documents or information for review.
The Importance of Loan Origination
Loan originators mainly act as filters, determining how approvable your loan request is and ensuring that any information, data, and documentation you submit has integrity. Loan origination essentially ensures that the rest of the loan process goes smoothly. If the information you turn in is correct, accurate, and true, you should have a completely uneventful closing.
Loan originators are also there to do much of the hard work for you. Assuming you provide all the necessary information, the loan originators can be there to sort out your past credit and your borrower profile even when you don’t know how to.
Del Toro Loan Servicing was founded in 2006 and has since been dedicated to becoming the leading provider of personalized loan services that are tailored to meet the specific needs and requirements of lenders and borrowers. Our services include basic and specialized loan servicing, processing and documentation, and loss mitigation.
We have also developed partnerships with some of the top brokers in the industry and can provide you with access to their services. We are dedicated to the ongoing education and flow of information with free seminars and learning tools. If you have further questions about loan origination or would like to start the loan application process with us, please don’t hesitate to contact us today.