Loans present you with a wide range of possibilities. Whether you are buying a car or a new home or trying to start a new business, loans give you the money you need to make your dreams come true. However, many potential borrowers easily get intimidated by the detailed process that goes into applying for and receiving a loan, but it all starts with loan origination.
Loan origination plays a key role in the process, but many people work with their banks instead of outsourcing their origination. Let’s take a closer look at the loan origination process and why you should outsource it for your hard money loan needs.
Loan origination refers to a multi-step process that everyone must go through if they are seeking a personal loan, particularly mortgages and home loans. Loan origination encompasses everything from the loan application to either declining the file or disbursing the funds. All processes after the funds have been disbursed are covered by loan servicing.
During the origination process, borrowers are required to submit various documents and information to their lender, including:
- Tax returns
- Credit card information
- Bank balances
- Payment history
- Credit reports
The lender then takes all of this information and determines if you are eligible for a loan. The process can be lengthy and time-consuming as it involves several steps and the consolidated effort of several staff members in the lending company. The general steps include pre-qualification, filling out the loan application, submitting the necessary documentation, screening, negotiations, and finalizing the loan application.
The first step in the loan origination process is pre-qualification. During this stage, a loan officer will meet with you, the potential borrower, to acquire all of the basic information and data relating to you and your income as well as information about real estate property that you want the loan to cover. This can include any sort of documentation that can verify your current income, employment status, and basic financial information.
Given this information, your lender may actually have enough information to already determine the type of loan that you may qualify for. Most loans fall into one of three types:
- Fixed-rate loans – Fixed-rate loans maintain the same interest rate throughout the entire longevity of your loan.
- Adjustable-rate mortgages – These loans have fluctuating interest rates that change based on an index, similar to bills, notes, bonds, and other Treasury securities.
- Hybrid loans – Hybrid loans combine the interest rate aspects of both fixed-rate and adjustable-rate loans. Most hybrid loans start as fixed-rate loans before eventually transitioning into adjustable-rate loans.
Based on your financial information and status, you may qualify for a loan from a government entity, like the Federal Housing Authority. The Department of Veteran Affairs also offers loans to current and former members of the military and their families. These are considered more unconventional loans and generally structured to make the process of purchasing a home much easier for people who qualify.
They often have nonexistent or low down payments and lower qualifying ratios, which are a set of ratios that lenders use to approve borrowers. Qualifying ratios can differ from lender to lender.
During pre-qualification, potential borrowers also receive a list of all the documents and information that the lender needs to complete the loan application. The list of required documents is extensive, and may include:
- W-2s and other tax forms
- Purchase and sale contracts
- Profit and loss statements for those who are self-employed
- Bank statements
- Mortgage statements for those seeking a loan to refinance an existing mortgage
The lender can also request additional documentation as needed.
The Loan Application
After pre-qualification, the borrower fills out a loan application and submits all of the documentation and information previously requested. The loan application should essentially contain all the information that a lender needs to determine whether your loan request is denied or accepted.
During this stage in the loan origination process, your loan officer will also go over the various loan options available to you and help you choose the type of loan that best fits your personal and financial needs. Your loan officer will also complete all the legally required paperwork on their end for processing. You may also work with a loan processor at this time. The loan processor assists the loan officer while helping to double check your application and verify your documentation before it is send forward to the underwriter.
Screening and Negotiations
Once the loan application has been turned in, the loan officer will screen the entire loan file to verify the potential borrower’s credit score, which essentially measures how you have managed and repaid past debts, including student loans, car loans, and home equity loans. It can essentially help a lender predict your ability to pay back loans in full and on time. Your loan officer will also determine if your personal income and finances. All of this helps the lender determine if you qualify for a loan. This step can vary, especially when dealing with hard money loans.
After the screening process, you may have an opportunity to negotiate your interest rates and develop more favorable loan terms for yourself. However, this is not standard among all lenders. Negotiations mainly depend on the lending company’s approach and your financial status and often come with a give and take.
For example, all loan originators take an origination fee as their primary form of compensation, similar to commission. The origination fee is usually 0.5 percent to 1 percent of the total loan amount. You may be able to negotiate a lower origination fee in exchange for a higher interest rate. This can be a good deal if you plan to sell or refinance your property within a few years, but it can otherwise end up with you paying more over time. Borrowers should keep this in mind when negotiating their final loan terms.
Filing the Loan
Once the loan application has been filed, it is completely out of the potential borrower’s hands. All of the paperwork and documentation that has been submitted and signed is filed and proceeds through various departments, including document processing and automatic underwriting programs. The lender may send some files to an actual underwriter for manual approval.
Once all your documentation and paperwork has been filed and approved, the lender will schedule a closing, appraise the properties you wanted the loan for, request any necessary insurance information, and finally send the loan file to the loan processor. The loan processor may follow up and request additional information and verification of documents to review the loan approval.
Understanding Hard Money Loans
While the overall process stays the same, certain aspects of loan origination change when applying for hard money loans. Hard money loans are similar to short-term bridge loans. Instead of being backed by a potential borrowers’ credit-worthiness, hard money loans are entirely based on the value of the property in question. Hard money loans tend to have lower loan-to-value ratios than traditional loans as the property itself acts as collateral to protect the lender against default by the borrower.
Hard money loans also have higher interest rates than traditional loans and are mainly used for short-term financing and in periods of financial recovery when an individual or company has been performing poorly (known as turnaround). Hard money loans are also commonly used by potential borrowers who have poor credit but a large amount of equity in their property and are trying to protect themselves against foreclosure.
Why Outsource Your Loan Origination?
The loan originator is the person in charge of the entire loan origination process, from application to the granting of the loan. Loan originators can be independent or work for a specific lender.
If you are applying for a hard money loan, you likely have to outsource your loan origination. Banks and other traditional lenders often do not make hard money loans due to the risks involved. Hard money lending entities are often private individuals.
However, even if you do not need a hard money loan, you may be better off outsourcing your loan origination to an independent entity. Loan originators who work for the bank only have the bank’s interests at heart, which may not always line up with your personal needs. Independent loan originators are more likely to prioritize your needs as your satisfaction directly affects the success of their business. Outsourced loan originators will help borrowers choose the best type of loan and direct potential borrowers to the lenders that offer the best deals.
Del Toro Loan Servicing was established in 2006 as a premier service for lending professionals. We are dedicated to providing personalized loan services, including loan origination, loan servicing, loan processing, and loss mitigation, all tailored to suit your business’ needs. We can provide you with access to our network of industry partners for trusted assistance. Del Toro is also dedicated to educating lenders, borrowers, and potential partners with free seminars, videos, and articles. If you want to learn more about loan origination or would like to work with us, please contact us today.