How does a loan origination system work?

A loan origination system automates the process of a loan from application to disbursement -- or rejection -- of the loan.

At one time, this process was done manually. But now, the loan origination system can automate and manage the steps, saving both the lender and the customer time by improving the accuracy and efficiency of the loan origination.

The process differs depending on the nature of the loan. A mortgage loan will move through the process in one way, a personal loan in another. In addition, one lender may handle loan origination differently from another.

Although the process differs from lender to lender, some things you can expect include:

Pre-qualification. This is where the lender determines if the borrower is eligible for the loan and checks the borrower's background. The borrower must submit a lot of documentation at this point, and a loan origination system can help move things along quickly and smoothly.

Application and application processing. During the application phase, the borrower actually applies for the loan. Digital portals and self-serve portals can speed up this part of the process. Application processing once took a long time, as the loan application had to pass through multiple departments. But a good LOS can cover a borrower's information quickly, raising red flags if they appear.

Underwriting and credit decision. This is where a lender looks at your financial picture and decides how much to lend. Many different scoring mechanisms come into play, and the right LOS can zip through them. The credit decision follows, determining whether or not a loan is issued to the borrower.

Quality check and funding. In the quality check, the lender makes sure the process is compliant with laws. If all is in good shape at this time, the funds are released.

Loans traditionally have taken a month or more to move through the process. But a good loan origination system can speed up how long it takes to be approved.

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