How to Streamline the Loan Approval Process

Regardless of the loan type a financial institution provides, an efficient loan approval process can determine customer conversion rates, especially when borrowers are shopping for multiple lenders. In a competitive lending market, borrowers are more likely to partner with the financial institutions that approve their loan applications fastest.

For many financial institutions, the immediate solution to expediting a loan approval may be to reduce the bureaucracy involved, which typically requires shortening application turnaround or minimizing borrower application requirements before a loan request is approved or denied. However, optimizing these processes isn’t always straightforward, especially for institutions newer to digital lending.

A modern, efficient solution to expediting the loan approval process is to integrate a platform like Fuse into your loan approval pipeline. Below, we’ll review the steps typically involved in loan approvals and explore the benefits of using an automated loan origination system to streamline the approval process.

What Are the Steps in the Loan Approval Process?

It’s important to know how the loan approval process works so you can effectively make lending decisions and improve your operational efficiency in the short and long term. The steps in the loan process are relatively similar across the different types of loans, whether your customers are applying for a mortgage, auto, or commercial loan.

Initial Application and Documentation Collection

The loan approval process starts with a lending institution collecting the documentation necessary to decide on the loan application. Although the specific documents requested will vary from one financial institution to another, most lenders ask their customers for documentation such as:¹

• Proof of employment
• Sources of income
• Statements of assets and liabilities
• Credit history

Depending on the loan application, lenders may place more emphasis on some loan documents over others. For instance, some auto loan applications may not require comprehensive statements of assets and liabilities whereas, mortgage or business loan applications may require extensive probing into a borrower’s creditworthiness.

In many cases, the documentation lenders request during the loan application process will depend on their perceived risk of approving and disbursing the loan.

Evaluation of Borrower’s Creditworthiness

A borrower’s creditworthiness points to whether a lender can trust the borrower will repay the loan within the specified terms without defaulting. Choosing a personalized consumer loan software can automate this process based on the rules you set. The most common factors lenders review when assessing creditworthiness include:²

• Credit report – By providing historical data of how much debt a borrower owes, including the balances on each debt and their available credit, a credit report enables a lender to understand the risk of lending to the borrower.

• Credit score – As a numeric indicator of creditworthiness, a credit score simply indicates where a borrower lies on the risk spectrum for credit approval. A low credit score means the borrower is a higher lending risk, whereas a high credit score indicates the borrower is a lower lending risk.

• Payment history – With data about a borrower’s credit history, lenders can better understand their financial responsibility and determine whether they can make payments on time—ultimately pointing back to the risk of lending to that borrower.

Assessment of Collateral (If Applicable)

Borrowers may provide collateral on their loan applications to improve their likelihood of final approval. Collateralized loans generally have lower interest rates than non-collateralized ones because they have a lower lending risk.³

However, financial institutions may still assess the risk on the collateral presented by borrowers, especially if other factors in the loan application point to the borrower being a high credit risk.

Risk Analysis and Underwriting

In many cases, the underwriting process comprehensively assesses the risk of lending to a customer by reviewing the risk factors involved, such as a history of missed payments on an existing mortgage.²

For instance, when underwriting a mortgage, underwriters evaluate appraisals on a property purchase to ensure that a financial institution will unknowingly take on more risk than is necessary by approving and providing the loan to an applicant.

Decision-Making and Approval

Typically, the final decision on a loan approval depends on the underwriters. In the loan process,  if the risk of lending to a borrower is low enough to disburse the loan, the underwriters will approve the loan application.

Sometimes, underwriters require more information to make a lending decision and may ask for additional information from borrowers before making a final approval or rejection decision.

Loan Closing and Disbursement

Finally, once approved, lenders submit the loan paperwork to borrowers so they can review and agree to the loan terms before closing. Following the loan approval, the loan is disbursed at the interest rate determined by the lender and agreed upon by both the borrower and lender.

How Long Does the Loan Approval Process Take?

The timelines for loan approvals can vary from hours to days or even weeks, depending on the type of loan. In general, most loan approvals are on the lengthier side, spanning days or weeks.

A longer timespan leaning into the multi-week territory is usually due to manual processes and cumbersome completion of paperwork within fragmented systems. For example, some lenders complete their underwriting in-house using automated processes, whereas others outsource it to underwriters, especially if there is a need to conduct extensive appraisal on the collateral placed on the loan.

Lenders that outsource their underwriting may experience delays if the underwriters are also experiencing internal delays in completing underwriting tasks for other clients.

Additionally, the decision-making on mortgages and commercial loans may be more complex than with auto loans if multiple factors are being considered, such as borrowers’ liabilities and the collateral they have placed on the loan application.

How Does Fuse Save You Time & Money?

By optimizing the loan approval process, Fuse reduces many of these inefficiencies. Although most loan approvals are currently automated, many lenders still rely on manual processes to evaluate the risk of lending to prospective borrowers.

Fuse’s automated loan origination system (LOS) increases auto-approval and auto-clearing of loan approval stipulations and significantly shortens the lending process.

Today, many startups and fintech companies have adopted fully automated processes to approve loans, making them more competitive than their counterparts in the market when it comes to speedy approvals.

For these lenders, a modern LOS like Fuse can increase their speed up to three times their current loan approval rate without reducing quality in the process. This helps them maximize the savings they realize on lending to borrowers and achieve much higher satisfaction rates across the loans they provide.

Benefits of a Modern Loan Origination System

So what are some of the benefits of using a modern LOS in the loan approval process? Let’s take a look at the most recognized advantages.

Application Processing

The average lender applies to at least two to three lenders to increase the chances of being approved for a favorable loan.⁴

As a result, during peak market periods, such as in low-supply, high-demand times, lenders may be overwhelmed with hundreds to thousands of loan applications. A slow application processing workflow increases the burden on staffing and can reduce the quality of loan approval and origination.

By automating aspects of application processing, such as regulatory compliance and credit checks, a modern LOS can improve the speed at which loan applications are approved, which enhances borrowers’ overall satisfaction. Faster application processing also means borrowers are more inclined to proceed with your loan than with a competitor whose application processing is slower.

Auto-Approve Qualified Prospects

Depending on the housing market, mortgage approvals can take weeks, meaning that competition between lenders can come down to how fast borrowers’ loans are approved.

Rather than subjecting your prospects to the bureaucracy of waiting for loan approvals, an automated LOS can immediately approve their applications if they meet your standard creditworthiness criteria. In the long term, you’ll save time and money because staffing shortages will not slow down loan approvals, keeping your borrowers satisfied and your closing rate high.

Advanced Credit Decisioning

A loan origination system like Fuse also provides end-to-end support, meaning you will make data-driven decisions at each step of a borrower’s application.

For instance, at pre-qualification, Fuse streamlines preliminary decision-making on a loan application based on pre-determined eligibility requirements. Then, during the application, Fuse extensively analyzes your customers’ data to fully characterize the risk of approving their loan applications.

If accuracy is an issue, Fuse minimizes the margin of error during application processing by focusing only on the facts necessary to decide whether a borrower qualifies for the loan. Your institution is not required to conduct extensive research to determine loan applicants’ creditworthiness regarding the final loan documents.

Instead, Fuse works with the standards your company provides to determine whether or not it makes sense to approve these loan applications.

When determining creditworthiness for a borrower, it would be a good idea to become familiar with loan origination software for credit unions and banks.

Streamline Loan Approvals with Fuse

Whether your company provides auto, consumer, or commercial loans, Fuse is the solution you need to streamline loan approvals from start to finish. In an outdated lending environment where inefficiency and inaccuracy are common, Fuse eliminates human error by automating the manual tasks involved in loan origination processes.

Fuse’s simplified workflow also helps you understand a customer’s finances in seconds, allowing you to make fast decisions on loan approvals—and putting you ahead of the competition.

Fuse streamlines the review process by automatically disqualifying ineligible applicants, enabling you to focus time and resources on originating qualified loan applications.

Learn more about the efficiency Fuse can drive in your organization by scheduling a demo today.

Sources:

1. Investopedia. Mortgage Process Explained. https://www.investopedia.com/mortgage-process-explained-5213694/
2. Investopedia. Creditworthiness: Definition, How to Check and Improve It. https://www.investopedia.com/terms/c/credit-worthiness.asp
3. Investopedia. Collateralization: Definition, How It Works, Examples. https://www.investopedia.com/terms/c/collateralization.asp
4. CFPB. Exploring Loan Choices. https://www.consumerfinance.gov/owning-a-home/explore/contact-multiple-lenders