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What is loan origination?
Loan origination is the term used to describe the process that occurs when a buyer obtains a mortgage loan from a lender. It involves several stages, starting with the loan application by the borrower, the submission of appropriate documentation, the lender’s assessment of the application and the final granting of the loan.
Mortgage loan originators are responsible for managing the loan origination process from application to granting of a mortgage loan. A loan originator may work for a lender or be independent. The distinction is important because originators working for the bank have the bank’s interests at heart, whereas an independent loan originator can help buyers choose the best form of loan and know which lenders offer the best deals.
The loan origination process has numerous steps, including:
- Loan application — The homebuyer fills out a loan application form.
- Documents — Either during the initial application or after pre-approval, the buyer submits documentation to substantiate income, employment and financial status.
- Screening — The lender screens the loan application, verifies the buyer’s credit score and determines if the buyer’s income and financial status is such that the buyer qualifies for the loan.
- Negotiation — Depending on the lender’s approach and the buyer’s financial status, there may be an opportunity to negotiate favorable loan terms.
- Finalize loan application — Once the terms are agreed on, the loan application is processed by the lender, going through several departments, such as underwriting and documentation processing.
- Loan approval — After final processing, the lender decides to approve or reject the loan application.
After loan origination, the settlement or loan closing process takes place, funds are disbursed and title is transferred.
Loan origination example
Joseph and Mary have decided to buy a home in a rural community. They made an offer on a property for $165,000. After using Bankrate’s mortgage lenders comparison tool, they initiate loan origination by applying for a mortgage loan from their local bank. They fill in the forms and submit additional documentation such as what they earn, tax returns and details of their bank accounts. Their bank assesses this information and, after inspecting the property, offers Joseph and Mary a mortgage loan on very favorable terms, thanks to their good credit rating.
Are you interested in purchasing a new home? Use Bankrate’s loan comparison calculator to find the loan that best works for you.