What Is Origination?

Origination is the multi-step process that every individual must go through to obtain a mortgage or home loan. The term also applies to other types of amortized personal loans. Origination is often a lengthy process that is overseen by the Federal Deposit Insurance Corporation (FDIC) for compliance with Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act. A loan origination fee, usually about 1% of the loan, is intended to compensate the lender for the work involved in the process.

How Originations Work

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, they 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:

• Tax returns
• Payment history
• Credit card information
• Bank statements and balances

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 Steps and Requirements

Pre-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.

Origination to Approval

Once 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 loans, such as those provided 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 can require a smaller or no down payment, and the origination process can be somewhat easier as a result.

Example of Origination

Let'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 prequalify. 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.

The Bottom Line

It's a good idea to understand how the loan process works before you apply, whether it's for a personal loan or a mortgage. In the U.S., it's generally called origination. This process sees borrowers go through prequalification, application, underwriting, and approval before any loan funds are disbursed. Keep in mind that many lenders charge an origination fee, which is usually a small percentage of the loan value.