by Stormi Scott

How Does The Loan Origination Process Work?

The way lenders work to originate loans will forever remain a mystery. It seems as though almost every lender has their definition of "loan origination." For example, you may have a lender who says that the process can happen in less than 30 days and another who tells you months.

If you've been through the loan origination process, you know it's a tedious one; you could present two lenders with the same presentation, and one will accept you, and one will tell you goodbye. A loan origination department is responsible for managing everything from pre-qualification to funding the loan.

What is loan origination?

Loan origination is the process when a borrower applies for financing and then a lender processes that application. The entire process encompasses all the steps from the start (the loan application) to finish (funding). Keep in mind, for something like mortgages, there is a specific origination process.

Although every lender is different, here are the most popular steps we've seen lenders take during the origination process.

1. Pre-qualification

Pre-qualification is typically the first step where the borrower puts together a list of items like:

  • Household Income
  • Employment Information
  • Bill History
  • Bank Statements

2. Loan Application

Today, it's pretty standard for the borrower to complete a paper application, but sometimes lenders offer an electronic version. Be sure to fill in all the necessary fields in a loan application! If not, a lender will return the application to the borrower or a lender will reach out to the borrower to fill in the missing information.

3. Application Processing

Once a loan application is received, a lender or, in some cases, a sophisticated Loan Origination System (LOS), will review it for accuracy and completeness. Keep in mind, skipping fields is a big no-no and the application will be returned to the credit analyst or borrower to complete if not fully filled out.

4. Underwriting Process

Once the application is complete, the underwriting process begins. During the underwriting process, a lender will take into account things like credit scores, risk scores, DSCR, etc. It's not unusual for a lender to come up with their own type of "scoring." Sometimes this process is fully automated using technology that runs transaction data against underwriting guidelines.

5. Credit Decision

This is where the lender will approve, deny, or send back to the originator for additional information. Yes, you can revisit a denial if specific parameters change. For example, a smaller loan amount or interest rates.

6. Quality Control

Consumer lending is highly regulated. The quality control portion of the loan origination process is very important to lenders. In this step, typically, the request is sent to a quality control queue and run against internal and external rules and regulations.

7. Loan Funding

Oftentimes, lenders will initiate the funding process shortly after signing the loan documents. On the other hand, something like a business line of credit may require additional time for legal and compliance reasons.

FAQs

Here are just a few of the most asked questions about the loan origination process.

What Is A Loan Origination Fee?

It's not uncommon for a lender to apply a loan origination fee based on the loan amount. Much of this fee covers the cost of the lender taking the time out to help you during the loan process.

How much are loan origination fees?

You can expect to pay anywhere from 1% to 8%. Loan origination fees vary based on factors like credit score and duration of a loan.

what is a loan origination system?

The system not only manages, but also automates the loan application and disbursal of funds processes. The systems are usually used by more modernized banks.

Are you ready to start the Loan process?

Today, new technologies like Leverage make this process easier on the potential borrower by putting together all of the information before chatting with a lender. With Leverage, a potential borrower will be able to skip many of the steps in the loan origination process. See how Leverage works here. Once the borrowers have the information, they submit it to a lender and the waiting game begins.

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