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When you set out to apply for a mortgage, the process is referred to as mortgage loan origination. Here’s how it works.
What is mortgage loan origination?
When you first go to obtain a mortgage, the lender or loan officer “originates,” or initiates, the loan and the application. 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.
The origination process 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, however.
Mortgage loan origination requirements
When you begin the loan origination, 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 co-signer, you’ll need to provide information about their finances as well.
Steps in the mortgage loan origination process
If you’re eligible for a mortgage, you’ll first get a preapproval from a lender. A preapproval isn’t a firm commitment to lend, but it does show what you’re likely to get if you meet all of the underwriting requirements and your financial circumstances don’t change materially between the preapproval and the closing. During this part of the loan origination process, you’ll 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:
- 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 much mortgage you might qualify for.
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 and the home 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 and retirement funds
- The size of a down payment you expect to pay, and where it is coming from (such as a gift, inheritance or savings)
- What type of 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, or possibly at the time of application.
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 through a software program, 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. Don’t be surprised if you do get a request for more information — this is 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 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 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:
- 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.
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
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 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, especially as it pertains to where you are in your life or family cycle. For example, how likely are you to refinance or be in the house five, seven years from now?
3. Compare offers from different lenders
It’s crucial for your budget 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 who they would recommend. 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 finance agency, as well, which generally works with lenders of all kinds, and might be a good place to start.