Loan origination refers to the initiation of the loan application process, which occurs when a borrower submits their financial information to a bank or mortgage lender for loan processing. 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.
Loan Originators Are Salespeople
Loan originators are also known as loan officers, mortgage brokers, or simply salespeople. Loan officers may work for individual mortgage brokers, or for large retail banks that originate mortgage loans. (See mortgage brokers vs banks).
Either way, their main job duty is to get you in the door and get you to apply for a mortgage, whether it be a purchase money mortgage or a refinance.
Loan Origination Fee
And fees associated with the origination of a loan are called, you guessed it, loan origination fees. They are also known as mortgage points, which are represented 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 would be 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 homeowner, and is paid out only if and when the loan funds. This fee is basically the originator’s commission for funding your loan. Some say 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 could get anywhere, this fee should be low. The opposite is also true. Either way, it’s negotiable.
Brokers and banks may or may not charge a loan origination fee depending on the terms of the deal. A true no cost loan won’t include a loan origination fee, since it’s an out-of-pocket expense.
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. Most upfront banks and brokers will charge 1% of the loan amount, although this can vary. If you shop around, you may be able to avoid the loan origination fee altogether!
