how origination works
loans help consumers and businesses meet their financial goals and obligations they can be used to make large purchases pay off debt make investments or buy properties like homes in order to be approved the borrower must apply for financing borrowers must submit various types of financial information and documentation to the financial institution or other lender during the origination process some of the most common types of information and documents required include lenders then use this information to determine the type of loan and the interest rate for which the borrower is eligible lenders also rely on other information especially the borrower s credit report to determine loan eligibility it isn t uncommon for lenders in the u s to charge origination fees these are upfront charges that borrowers are required to pay the lender as compensation for the application underwriting and approval process normally ranging between 0 5 to 1 of the loan value the origination fee can be deducted from or added to the loan balance origination includes pre qualification of the borrower as well as underwriting and lenders typically charge an origination fee to cover the associated costs origination steps and requirementspre 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 property that the loan is intended to cover at this point the lender determines the type of loan for which the individual qualifies such as a personal loan 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 or a bond price such as 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 the borrower receives a list of information needed to complete the loan application during this stage this extensive required documentation typically includes the purchase and sale contract w 2 forms profit and loss statements from those who are self employed and bank statements it will also include mortgage statements if the loan is to refinance an existing mortgage the borrower fills out an application for the loan and submits all necessary documentation the loan officer then completes the legally required paperwork to process the loan borrowers only pay origination fees if the loan is approved origination to approvalonce the application is complete and the documentation submitted the process is now out of the borrower s hands all paperwork submitted and signed until this point is filed and run through an automatic underwriting program to be approved some files might be sent to an underwriter for manual approval the loan officer then gets the appraisal requests insurance information schedules a closing and sends the loan file to the processor the processor may request additional information if necessary for reviewing the loan approval some mortgage borrowers might be eligible for government backed loans such as those insured by the federal housing administration fha or the u s 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 they often feature lower qualifying ratios and a smaller or no down payment and the origination process can be somewhat easier as a result 34example of originationlet s say a consumer wants to purchase their first home they put in an offer on a property and the seller accepts the two parties sign a contract and agree to a purchase price of 200 000 the buyer has a total of 50 000 saved up which means they need to borrow 150 000 to cover the remaining balance the buyer goes to their bank abc bank to see if they pre qualify when they do abc bank asks them to submit a formal application and furnish supporting documents including their proof of income tax returns bank statements and approval for a credit check the application and documents are sent to the underwriting department of abc bank to assess whether the borrower is a suitable candidate for the mortgage after four weeks the bank approves the loan contacts the borrower and arranges a time to sign the paperwork the borrower is notified of the interest rate and loan terms and also agrees to pay the loan origination fee of 1 or 1 500 this can either be deducted from the loan balance resulting in the disbursement of 148 500 pay it upfront or have the seller pay it for them 