Definition:
Loan origination is the process by which a lender reviews, approves, and sets up a new mortgage for a borrower. It starts with a loan application and ends when the loan is approved and funded.
Example:
When Jasmine decides to buy her first home, she fills out a mortgage application with her lender. The lender reviews her credit, income, and assets. After approval, Jasmine signs the final documents and receives her loan—completing the loan origination process.
Explanation:
Loan origination involves several steps and includes both the borrower and the lender. Here’s how it typically works:
- Application – The borrower submits personal and financial information to start the process.
- Processing – The lender gathers and verifies documents like tax returns, pay stubs, bank statements, and credit reports.
- Underwriting – A loan underwriter assesses the borrower’s risk and decides whether the loan should be approved, denied, or approved with conditions.
- Approval – Once approved, the loan moves toward closing.
- Funding – The loan is funded, and the money is used to complete the home purchase.
Loan origination also includes associated fees known as loan origination fees, which cover the lender’s administrative costs and are often 0.5% to 1% of the loan amount.
Why is Loan Origination Important in Real Estate Transactions?
Loan origination is critical because it determines whether a buyer can actually finance the home they want to purchase. For buyers, understanding the origination process helps set expectations and avoid delays. For sellers, a buyer with a solid lender and a strong start in loan origination is more likely to close on time. This process is the foundation of most real estate transactions involving financing.