Saturday May 27, 2017
 

Loan Origination

Before you can get a loan on a home, you have to go through a process called loan origination.

Loan origination actually refers to several steps—the first being the submission of your information to the lender, the second being the review of that information, the third being the possible approval of the loan (or the decline, which may or may not include a request for clarification or new conditions to be met).

When you apply for a loan, you’ll need to submit some information to the lender or bank.  Loan origination is also called “loan processing.”  To process your loan, the bank or lender will need information on your credit score, your income and employment status, and your assets.  To provide this information, you’ll need to sign some release forms.

These allow the lender to go and get your credit report and other information about your finances.  The person you talk to when you apply for a loan is called a “loan originator.”  The loan originator is the salesperson who provides you with the loan application and explains the benefits of the loan to you. 

Once all this paperwork has been submitted and the bank has retrieved all the information, it needs to make a decision: an underwriter (not the same person as the loan originator) will be in charge of reviewing the data and making that decision.

The underwriter may choose to approve your loan, suspend it temporarily until more information is received or certain conditions are met, or decline the loan altogether.

Even if your loan is approved, you may still need to meet further requirements in order for the loan to be funded and provided to you.  This process may take you little to no time at all or it could result in major delays depending on your circumstances and what the lender requests that you do to get the loan.  Only after those conditions are met will the funding department procure the money and provide it to you in whatever form (lump sum, line of credit, monthly installments, etc.) you have agreed upon.

There is a cost associated with loan origination beyond just the cost of the loan and the interest which you’ll owe over time.  This price is called a loan origination fee.  The loan origination fee often consists of several fees lumped together, also expressed as mortgage points.  The “points” refer to what percentage of the loan is used to calculate the origination fee.

For example, suppose you are applying for a loan for $100,000 and the lender is charging you one mortgage point as your loan origination fee.  That means your loan origination fee will equal $1,000.  This is a very common percentage.

What determines the mortgage point of the loan and how high or low the origination fee will be?

The main factors are the loan originator and the type of loan in question.  For relatively uncomplicated loans, the fees will be lower.  For complex, hand-tailored loans, the fees will be higher.

The origination fee may or may not include other fees for processing your application and paperwork.  If it doesn’t, you’ll probably have to furnish those fees separately.  The loan origination fee itself is the commission which the loan originator is paid for selling you the loan.

If you’re offered a “no cost” loan, there shouldn’t be a loan origination fee.  There shouldn’t be any fees at all—only the cost of the loan which must eventually be repaid with interest.

“No cost” loans do exist though, so if it’s your goal to avoid origination fees you should be able to do so.  You will probably pay a price though in terms of a higher interest rate or some other terms which are more strict.  Shop around and find the best deal, not just on loan origination fees but on the whole, before you commit to any loan.

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