What is 'Origination'
Origination is the multi-step process every individual must go through when obtaining a mortgage or home loan, as well as other types of personal loans. During this process, borrowers must submit various types of financial information and documentation to a mortgage lender, including tax returns, payment history, credit card information and bank balances. Mortgage lenders use this information to determine the type of loan and the interest rate for which the borrower is eligible.
BREAKING DOWN 'Origination'
The origination process is often lengthy and involves a number of steps. The loan origination fee, which is usually 1% of the loan, typically covers this process. Lenders also rely on other information, especially the borrower’s credit report, to determine loan eligibility.
Pre-qualification is the first step of the process. The loan officer meets with the borrower and obtains all basic data and information relating to income and the real estate property that the loan will cover. This is when the lender determines the type of loan for which the individual qualifies, which is usually one of three common loan types. Fixed-rate loans have a continuous interest rate for the entire life of the loan, while adjustable-rate mortgages (ARMs) have an interest rate that fluctuates in relation to an index, similar to Treasury securities. Hybrid loans feature interest-rate aspects of both fixed and adjustable loans. They most often begin with a fixed rate and eventually convert to an ARM.
Some borrowers may be eligible for a government loan, such as one provided by the Federal Housing Authority (FHA) or the Department of Veteran Affairs (VA). These loans are considered non-conventional and are structured in a way that makes it easier for eligible individuals to purchase homes. These loans often feature lower qualifying ratios and can have a smaller or non-existent down payment.
During this step, the borrower receives a list of information needed to complete the loan application. The extensive required documentation includes the purchase and sale contract, W-2s, profit-and-loss statements (for the self-employed) and bank statements. It also includes mortgage statements if the loan is a refinance of an existing mortgage. The lender may also request additional documentation.
During this stage of the process, the borrower fills out an application for the loan and submits all the necessary documentation. The loan officer discusses which loan options are available and helps the borrower choose the one that is most suitable. The loan officer completes all legally-required paperwork to process the loan.
The process is now out of the borrower’s hands. All paperwork submitted and signed up to this point is filed and run through an automatic underwriting program to be approved. Some files may be kicked to an underwriter for manual approval. After approval, the loan officer schedules a closing, gets the appraisal, requests insurance information, and sends the loan file to the processor. As a follow-up, the processor may request additional information, if necessary, for reviewing the loan approval.