Businesses are always looking to make their operations more efficient, and it’s no different for consumer lenders. Because of its significance early in the lending process, the introduction of technology often starts with loan origination. Processing loans requires lenders to gather considerable information and analyze an applicant’s creditworthiness, all while following specific rules and regulations. Additionally, lenders should view the loan origination process as more than adding to their portfolios but should also be a point when they can create loyal customers.
The prevalence and importance of the data gathered within loan originations lends itself well to the digitization of the process. Technology can significantly improve a lender’s operations, speeding workflows while reducing risk exposure. This added efficiency makes for quicker decisioning, which in turn creates a better consumer experience. While technology can improve any part of a lender’s operations, the loan origination process is where technology can yield the most benefits.
Getting a new mortgage or refinancing your existing home loan can seem complicated, with lots of paperwork, jargon, and waiting around. While every lender has slightly different processes, the loan origination process generally follows similar steps. Understanding what to expect can help you navigate the mortgage process with less stress.
Overview of the Loan Origination Process
Loan origination refers to the process a lender follows to get a new mortgage application from initial inquiry to closing and funding. The loan origination process typically involves the following key steps:
- Initial Application and Prequalification
- Mortgage Preapproval
- Property Search and Offer
- Final Loan Application
- Processing and Underwriting
- Appraisal and Home Inspection
- Closing and Funding
While each step builds on the previous one it’s common to go back and forth a bit depending on any issues that come up. Let’s look at each of these steps in more detail.
Step 1: Initial Application and Prequalification
The first step when applying for a mortgage is to get prequalified by a lender. Prequalification gives you and the lender a rough estimate of how much home you may be able to afford based on your income, debts, and savings.
To get prequalified, you’ll provide information on:
- Your gross monthly income
- Your monthly debts and credit accounts
- Your cash available for down payment and closing costs
Based on this initial snapshot, the lender will tell you the maximum home loan amount you may qualify for.
Getting prequalified early on helps you set realistic expectations when you start looking at homes in your price range. And showing sellers a prequalification letter indicates you’re a serious buyer who has done some homework on affordability.
Step 2: Mortgage Preapproval
The next step is to get a mortgage preapproval from a lender. Preapproval takes your initial prequalification and verifies the details through documentation.
To get a preapproval letter, you’ll need to provide proof of your financial situation, including:
- Pay stubs to confirm employment and income
- W-2s and tax returns if self-employed
- Bank statements to show your assets and cash reserves
- Credit report to check your credit score and history
The lender will thoroughly assess your income, savings, credit, and debts and determine the maximum mortgage amount you’re approved to borrow.
Preapproval typically takes 1-2 weeks and results in a letter stating you’re approved for a mortgage up to a certain dollar amount. This letter shows home sellers you’re a qualified buyer so you can make a strong offer.
Step 3: Property Search and Offer
Now it’s time to start hunting for your dream home! Your preapproval letter gives you power to make compelling offers since sellers can have confidence you’re able to get financing.
Key steps when you’re ready to make an offer include:
- Submitting your earnest money deposit to show you’re serious
- Making your offer contingent on home inspection and appraisal
- Locking in a mortgage rate with your preapproval lender
If the seller accepts your offer, you’ll move on to gathering all the materials needed for your full loan application and approval.
Step 4: Final Loan Application
At this point you’ve found the property you want to buy and your offer has been accepted. That means it’s time to complete your full mortgage application and underwriting documentation.
Items you’ll need to provide your lender may include:
- Signed purchase contract
- Updated bank statements and employment verification
- Earnest money deposit receipt
- Copy of home inspection report
- Completed loan application forms
You’ll also receive a Loan Estimate from your lender laying out your expected loan terms, interest rate, projected payments, and closing costs.
Provide all documentation quickly and accurately so your loan can move smoothly through processing and underwriting.
Step 5: Processing and Underwriting
The loan processing stage is when your lender verifies all the information and documentation you provided. This involves:
- Ordering third-party reports such as your credit report and property appraisal
- Confirming your employment status and income
- Documenting the source of your funds for down payment and reserves
- Ensuring all data and forms are complete before underwriting
Underwriting is when a lender’s team carefully evaluates your entire loan application package and creditworthiness. The goal is to ensure you meet the lender’s mortgage approval guidelines.
Factors the underwriters consider include:
- Your income sources and cash flow
- Your credit history and scores
- Your total monthly expenses and debts
- The appraised value of the property
This risk assessment results in either loan approval or denial. You may also be approved with certain conditions you need to fulfill.
Step 6: Appraisal and Home Inspection
Two important evaluations happen around the same time as loan processing:
Home Appraisal
- The lender hires an appraiser to evaluate the property
- Appraisal checks the home is valued at the purchase price
- Helps ensure the property will be adequate collateral for the loan
Home Inspection
- Recommended to identify any physical issues with the home
- Inspector looks at structure, construction, appliances, and systems
- Inspection may uncover repairs needed before closing
Both reports are important to either move forward confidently with the purchase or address any concerns before it’s too late.
Step 7: Closing and Funding
Congratulations, you made it to closing day! This is when you finalize the purchase and become a homeowner.
Some key steps at closing include:
- Reviewing your Closing Disclosure for final loan costs
- Signing all your loan documents and closing paperwork
- Paying your down payment and closing costs
- Getting the property keys and ownership transferred
Once closed, your lender will disburse the mortgage funds and the sale is complete!
Tips for a Smooth Loan Origination Process
- Shop multiple lenders to compare mortgage rates and fees
- Get prequalified early so you only look at homes in your budget
- Respond quickly to lender requests for documentation
- Be upfront about your financial situation and credit history
- Study your Loan Estimate and ask questions before closing
- Request closing several weeks before your moving date
- Come prepared to closing with proper funds and ID
Step 3: Processing the Application
At this stage, a lender’s credit department reviews the application for completion and accuracy. Many online applications won’t allow applicants to move forward if certain required fields haven’t been filled out or specific information is missing, which speeds up workflows and helps maximize a lender’s efficiency.
A good LOS will also automatically apply decision rules to establish an applicant’s creditworthiness, resulting in near-instant decisions and consistent compliance. In addition to significantly speeding the loan origination process, an automated LOS can flag specific applications for review. Once flagged, alternative credit data and trended credit data can be applied during the underwriting process.
Steps of the Loan Origination Process
From prequalification to the funding of a loan, using technology benefits both lenders and their customers. Modern loan origination systems (LOS) automate the process, which expedites communication and reduces risk. Quick decisioning shows consumers that a lender has efficient processes in place, which will allow them to respond to other issues quickly. At every step, technology improves the confidence and security of all parties involved.
| 6 Steps of the Loan Origination Process | |
|---|---|
| 1) Pre-Qualifying Period | Applicants submit certain documents with personal information, which is used by the lender to make an informed decision. |
| 2) Applying for a Loan | Enabled by digital loan origination, applicants apply for a loan online using a PC or mobile device. |
| 3) Processing the Application | A modern LOS automatically applies decision rules to establish an applicant’s creditworthiness. |
| 4) Underwriting Process | The underwriting process is critical to lenders, as this is a crucial point at which risk is mitigated. |
| 5) Quality Control | At the quality control stage, data is evaluated against both the lender’s internal and regulators’ external guardrails. |
| 6) Funding the Loan | At this final stage, a lender’s LOS ensures that everything necessary for compliance has been done. |
7 Stages in Loan Origination
What are the steps in the mortgage process?
Nevertheless, the mortgage process can be broken into a number of well-defined steps. Most people go through six distinct stages when they are looking for a new mortgage: pre-approval, house shopping, mortgage application, loan processing, underwriting, and closing. In this guide, we’ll explain everything you need to know about each of these steps.
What is loan origination?
Loan origination is the process lenders use to assess and approve borrower applications for various forms of debt. These include loans and mortgages. Originations go from the initial application for credit through underwriting and the approval process.
What are the steps in the mortgage origination process?
Steps in the mortgage origination process include getting preapproval, applying for the loan, waiting for loan processing and underwriting and attending closing day. Many lenders charge a fee for originating a mortgage, which typically costs between 0.5 percent and 1 percent of the loan amount.
What is mortgage origination?
Here’s an explanation for Mortgage origination is the process through which the lender creates your loan. Steps in the mortgage origination process include getting preapproval, applying for the loan, waiting for loan processing and underwriting and attending closing day.