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When you embark on a home-buying journey, one of the many jargon-laden phrases you’ll hear is “mortgage loan origination.” It’s a mouthful that actually has a simple meaning: the creation of your loan. And it’s kicked off by your application.
Here’s how mortgage loan origination works, and the role you play in it.
What is mortgage loan origination?
Mortgage loan origination is the process of your loan being established. When you formally apply for a mortgage, the lender or loan officer “originates,” or initiates the loan (or, to be more precise, considering your request for one).
To complete an application, you’ll present details about your financial life, including your income, debt and assets. The lender verifies this information and then determines whether to approve you for a loan and how much you can borrow, as well as at what interest rate.
Initiating a mortgage typically comes with a fee, known as the mortgage origination fee, often equal to 0.5 percent to 1 percent of the loan principal. This fee might be as high as 2 percent if you’re a riskier borrower. The fee covers the time and cost of your application being reviewed and processed by the lender.
Documents required to begin the mortgage loan origination process
As your mortgage is being originated, be prepared to provide:
- Proof of income, including tax returns, W-2s and 1099s
- Proof of assets and expenses, including bank and other account or brokerage statements,
- Photo identification (for all borrowers)
You might need to provide additional documents depending on which type of loan you apply for. For a VA loan, for example, you’ll need proof of military affiliation; for a USDA loan, you’ll need information about the property’s location. If you have a cosigner, you’ll need to provide information about their finances as well.
Why is mortgage loan origination significant?
Steps in the mortgage loan origination process
The mortgage origination process happens in stages, and typically takes between 30 and 60 days to complete. Origination speed varies depending on the lender, mortgage type and applicant’s credit. Generally, prospective homeowners can expect the following steps in the process.
If you’re eligible for a mortgage, often you’ll first receive preapproval from a lender. (You can also apply for preapproval for financing in general, before you formally apply for a mortgage on a specific property). A preapproval isn’t a firm commitment to lend, but it does show how much you’re likely to get if you meet all of the underwriting requirements and your financial circumstances don’t change substantially between the preapproval and the actual closing on the home.
During this part of the loan origination process, you’ll provide specific financial documents to your lender and undergo a credit check, so the lender can determine your creditworthiness. Some of these documents include:
- Recent pay stubs
- Last two years of income tax returns and W-2s (or business records, such as profit and loss statements, if you’re self-employed)
- 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 and how large of a loan you might qualify for.
Along with (or after) preapproval, you’ll have to complete an application for the specific loan type you’re after, which requires a thorough vetting of your finances and the property you’re buying, including:
- Any debt you have, like student loans and credit cards
- Your work history and income
- Assets such as bank accounts, stocks, bonds and retirement accounts
- The size of a down payment you expect to pay, and where it is coming from (such as a gift, inheritance or savings)
- An appraisal of the property you’re purchasing
Once you submit the application, you’ll receive a loan estimate, a document detailing all of the estimated costs of the loan you applied for. Lenders quote these costs upfront to allow borrowers to compare offers. You’ll receive the loan estimate within three days of applying, though in some cases you may be provided with an immediate estimate.
Depending on your lender, there might 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. The lender evaluates information either through a software program or manually —or sometimes both — to reach a decision about loaning you a mortgage. At this time, the lender can approve or deny the loan, or ask for more information — that is, approve you conditionally. Don’t be surprised if you do get a request for more information: It’s very common.
When your application for a mortgage has been approved and underwriting is complete, you’ll get a final commitment letter for the loan. The next step is 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 at this time, which includes the origination fee if your lender charges one. There might be other fees, as well, such as an underwriting fee or documentation preparation fee and title insurance and attorney fees.
The various closing costs and fees fall into three categories:
- Those that may not change between the application estimate and your final closing figure
- Those that may go up to 10 percent
- Those that may go up without limit under special circumstances
If allowable changes occur, a revised loan estimate will be provided.
You can negotiate closing costs in several ways. You may ask your lender for a discount, or for the seller to pitch in.You may also apply to roll the costs into your loan, which may save you money upfront, but can cost you more over the life of the loan.
How to prepare for the loan origination process
It can be time-consuming and sometimes stressful to go through the mortgage origination process, so preparation is key. The mortgage application process can be nuanced and complex, but there are a few steps you can follow as you prepare to move forward.
1. Check your credit
Well before you apply for a mortgage (or even seriously consider buying a home), check to confirm that your credit score meets minimum requirements and make sure your credit report is error-free. The higher your score, the better your options and less interest you can expect to pay.
Fix any errors on your credit report, and raise your score by paying down debt and avoiding taking on more. Avoid any late payments on rent, credit cards, student loans or car loans. 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, especially as it pertains to where you are in your life. For example, how likely are you to remain in the home five or 10 years from now?
3. Compare offers from different lenders
It’s crucial to find the best lender for your situation. Talk to at least three mortgage lenders, ideally starting with your own bank to see what kind of relationship programs it offers. Ask your friends, family and real estate agent which lenders they would recommend. Note that there are different types of mortgage lenders: national banks, credit unions, thrifts, mortgage bankers and online lenders. Each state has a housing finance agency, as well, which generally works with lenders of all kinds and might offer special home buying assistance programs.
Additional reporting by Meaghan Hunt