What is Loan Origination?
Loan Origination Explained
The term loan origination encompasses the process that begins when a borrower applies for a new loan, through the processing of the application by the lender, and ultimately ends with either an approval and disbursement of funds or a declination. If the loan is approved, the loan origination date is the date at which the loan is funded.
In regards to home loans, mortgage origination is a more complex subset of loan origination. The requirements are more involved, and there is much more paperwork, involved in mortgage origination due to the plethora of loan products available, each with varying eligibility requirements. In addition, a number of consumer protection regulations are in place that also stretch the process, leading to the requirement of mortgage underwriting.
A mortgage originator is the original lender to approve a mortgage. Mortgage originators are defined as any individual or institution that works with a borrower to complete a mortgage transaction. This can be a mortgage banker (or simply the bank as an entity) or a mortgage broker, depending on the method the borrower chose to use.
Loan Origination Fees
For the act of processing a borrower’s application for a new loan, most lenders require compensation upfront. This sum of money is known as an origination fee. Lenders will typically charge anywhere from 0.5% to 1% of the total loan amount as an origination fee. This would make a 1% origination fee for a home loan of $100,000 come out to $1000. It’s similar to a commission for processing the loan. In many cases, the loan origination fee can be negotiated but is mostly reduced for much larger loan amounts, like with jumbo loans.