Depending on documentation type, a borrower will have to supply certain credit, income, asset, and employment information to a specified bank or lender to initiate the underwriting of the loan application.
Along with that, the borrower will have to sign forms that allow the mortgage broker (if applicable) and bank or lender to pull a credit report and release information about the borrower.
Once the information is submitted to the appropriate bank or lender, an underwriter will decision the application, either approving, suspending, or declining the loan.
If the loan is approved, a set of conditions will be released that need to be met before the loan can move to the funding department. If suspended, certain paperwork or an explanation may be necessary to proceed any further. If the loan is declined, the borrower will need to send the loan elsewhere or possibly apply under a different program.
To sum it up, loan origination is simply the creation of a mortgage. It may begin with a phone call, an e-mail, a mortgage rate quote, or a referral from a real estate agent.
Loan Originators Are Salespeople
So who’s behind all this loan origination anyways?
Well, loan originators of course. They’re also known as loan officers, mortgage brokers, loan specialists or simply salespeople. Or some other cute name a company comes up with like “loan hero” or “loan scientist.”
These originators may work on behalf of individual mortgage brokers, or for large retail banks that originate thousands of mortgage loans each month. (See mortgage brokers vs banks).
Now this isn’t to say that they’re pushy salespeople, it just means their highest priority is “getting a sale.”
They can also be quite helpful in guiding you through the home loan process, largely because both your incentives and theirs are aligned. You want your loan to close and they get paid when it does. So everyone is on the same page.
Loan Origination Fee
The fees associated with the origination of a loan are called, you guessed it, loan origination fees. They are broken down into mortgage points, which are expressed as a percentage point of the loan amount. So if the loan amount is $100,000, and you see a $1,000 loan origination fee on the paperwork, the bank or broker is charging you one mortgage point.
This “loan origination fee” is paid to the loan officer or broker who initiates and completes the loan transaction with the borrower, and is only paid out if and when the loan funds. This fee is basically the originator’s commission for getting you a loan. Some originators may tell you that it is paid to cover loan processing/application costs, though it’s pretty common to pay those along with the loan origination fee. Go figure.
The loan origination fee will vary based on who you decide to work with, and how complicated your loan is. If you’ve got a cookie-cutter loan that you can get anywhere, this fee should be low. The opposite is also true. Either way, it’s negotiable.
Brokers and banks may not even charge a loan origination fee directly to the borrower, depending on the terms of the deal. A true no cost loan doesn’t include a loan origination fee paid for by the borrower because it’s an out-of-pocket expense. However, this means your interest rate will be higher as a result (lender paid compensation), all else being equal. Loan originators have to make money somewhere, so if it’s not being charged on the front-end, they’ll make up for it on the back-end.
Either way, all fees should always be fully disclosed on the Good Faith Estimate and Hud-1. Pay close attention to this figure to see exactly what you’re being charged, whether paid out-of-pocket or via a higher-than-market interest rate. Most upfront banks and brokers will charge 1-2% of the loan amount, although this can vary. If you shop around, you may be able to avoid the loan origination fee altogether, and get that low rate you’re after!
Tip: Don’t confuse loan origination charges with discount points, the latter being what you pay if you want a lower mortgage rate, which is totally optional.