Mortgage origination is the process by which a borrower applies for a home loan, along with all of the stages leading up to the borrower getting the keys to the home.
Steps in the mortgage loan origination process
The mortgage origination process entails several steps to get you into a home, says Dave Rouse, director of Single Family Housing for the Wisconsin Housing and Economic Development Authority (WHEDA) in Milwaukee, Wisconsin.
In many areas, homebuyers may need a preapproval from a lender to tour a home with a real estate agent or the owner. A preapproval letter saves time and effort for all parties involved. During this part of the loan origination process, you provide specific financial documents to your lender, as well as undergo a credit check, so the lender can determine if you are a creditworthy borrower. Some of these documents include:
- Up-to-date pay stubs
- Last two years of income tax returns and W-2s
- Recent statements from your bank accounts
- Investment information
- Your driver’s license or passport
With all of this information, the lender can make a fair estimate of how much house you’ll be able to afford.
Along with a preapproval, you’ll have to complete an application for the specific loan type you’re after, which requires a thorough vetting of your finances.
“Craft a budget by listing all monthly income and liabilities,” Rouse suggests.
You should also check your credit report free online at AnnualCreditReport.com. If there are no errors or issues on your report, it’s time to apply. You can usually apply online, by phone or mail, or even face-to-face with the lender, especially if applying with a bank or credit union.
During the application process, you will receive a loan estimate, a document detailing all of the costs of the loan you applied for. Lenders quote these costs upfront to allow borrowers to compare offers, Rouse explains. You will receive the loan estimate within three days of applying, or possibly at the time of application.
Depending on your lender, there may be a one-time application fee, as well.
Loan processing and underwriting
During loan processing and underwriting, the lender and underwriters assess your information, sometimes called your risk profile, to see how much of a mortgage you can handle and pay back on time.
You will be answering a lot of questions, filling out many forms and handing over personal documents. Some of the information you’ll be expected to provide includes:
- Any debt you have, like student loans and credit cards
- Your work history and income
- Assets such as bank accounts, stocks and retirement funds
- The size of a down payment you expect to pay, and where it is coming from
- What type of property you’re purchasing
The lender then evaluates all of your information, either through software, manually or both, to come to a decision about loaning you a mortgage. At this time, the lender can approve or deny the loan, or ask for more information.
When your application for a mortgage has been approved and underwriting is complete, the next step is the closing.
During the closing, you’ll sign paperwork agreeing to the loan terms and the transfer of the property, and get the keys to your new home. You’ll also be responsible for paying closing costs, which can include an origination fee, an expense the lender charges for initiating and processing the loan.
An origination fee “is typically a percentage of the loan amount,” Rouse says, and one of the ways lenders cover their costs for handling the loan. Fairly common is 1 percent — for instance, you’d be charged a $2,000 origination fee on a $200,000 loan — but it can vary from lender to lender and by market.
There may be other fees from the lender, as well, such as an underwriting fee or documentation preparation fee. When there is no origination fee, the lender compensation is often built into the rate or loan profitability, Rouse says.
The various closing costs and fees fall into three categories:
- Some may not change
- Some may go up to 10 percent
- Some may go up without limit under special circumstances
If allowable changes occur, a revised loan estimate will be provided.
Lenders are for-profit entities competing for the loan business, Rouse says, so “you can shop around. Closing costs and rates will vary. Some may negotiate, others will not.”
You can negotiate closing costs in several ways, such as asking your lender for a discount or the seller to pitch in, or rolling the costs into your loan (which can save you money upfront, but can cost you more over the life of the loan).
How to apply for a mortgage
It can be time-consuming and sometimes stressful to go through the mortgage origination process, so preparation is key.
1. Check your credit. Check to confirm that your credit score meets minimum requirements and your report is error-free. The higher your score, the better your choices and less interest you pay.
Fix what needs to be fixed, and raise your score where you can by paying down debt and avoiding taking on more. Avoid any late payments on rent, credit cards, student loans or car loans, and be sure to keep the same job, if possible, because stability is crucial in the eyes of a lender.
2. Understand the type of mortgage you might want. From conventional to USDA loans, know the differences of each loan type and which one fits your finances and situation best.
3. Compare offers from different lenders. It’s crucial for your budget to find the best lender for your situation. Rouse recommends talking to a number of lenders. Ask your friends, family and real estate agent who they would recommend.
“Find a lender to whom you can relate, in whom you have confidence. Choose one and get preapproved before finding the right Realtor to help in searching for a home,” Rouse says.
Note there are different types of lenders — national banks, community banks, credit unions, mortgage brokers, mortgage bankers and online lenders. Each state has a housing organization, as well, which generally works with lenders of all kinds, and may be a good place to start.
“Every state has a ‘mission based’ housing finance authority or agency like WHEDA,” Rouse says. “We sell tax-exempt bonds to support discounted home loans to first-time homebuyers and veterans, as well as provide down payment assistance.”
Featured image by PeopleImages of Getty Images.