What Is a Loan Origination Fee?

The cost of originating mortgages

If you’re thinking about getting a mortgage loan, it’s crucial to familiarize yourself with the different fees involved, including those you’ll pay at closing.

Closing costs include many fees like the appraisal and title insurance, yet a significant component of this is the loan origination fee.

This might sound like another piece of financial jargon. However, it’s important to understand how this fee works because it affects the cost of finalizing your mortgage.

What is an origination fee?

To put it simply, the origination fee is charged by mortgage lenders to cover the costs of processing a loan application.

These are common across mortgages, as well as other types of loans like personal loans and business loans. Lenders include this fee to recoup the expenses they incur with reviewing loan applications, checking a borrower’s credit, verifying their financial information, and preparing the loan documents.

How much are origination fees?

Typically, mortgage origination fees cover a percentage of the total loan amount. The exact percentage, however, can vary by lender and the type of loan. But in many cases the origination fee is about 0.5% to 1% of the loan amount. So if you borrow $200,000, you’ll pay upwards of $2,000.

Some lenders offer “$0 mortgage origination,” which means they waive the typical charge for processing a loan. In exchange, the borrower pays a slightly higher mortgage rate.

Understanding how this fee works is important because it affects the overall cost of your loan.

So as you compare loan offers, pay attention to the origination fee along with other costs like the interest rate.

When you apply for a mortgage, the lender will provide you with a Loan Estimate. This document gives an overview of the terms and costs associated with the loan. As you review your estimate, look under the “Loan Costs” section to find details about the loan origination fee.

Keep in mind that lenders have their own way of structuring fees. But while their breakdown may differ, common components of the origination fee might include:

• Loan Processing: This covers the administrative tasks involved with reviewing and processing your loan application. It might include tasks like collecting and verifying your information and ordering credit reports.

• Underwriting: This fee covers the cost of assessing your creditworthiness, analyzing your financial documents (like income verification and tax returns), and determining the terms of your loan.

• Document Preparation: This fee covers preparation and organization of all necessary loan documents, such as the loan agreement, mortgage note, and other legal paperwork needed for closing.

When do you pay origination fees?

Closing is when you finalize the home purchase and sign all mortgage documents. At this time you’re required to pay the origination fee along with other closing costs (through either a certified check, cashier’s check, or wire transfer).

If you find it challenging to cover these fees, some down payment assistance programs may offer financial help. But while there aren’t specific programs dedicated to origination fees, you can use grant funds to pay your closing costs, which include the origination fee.

These programs vary by location and have specific requirements and limitations. To learn about available programs in your area, reach out to your mortgage lender, local housing agencies, non-profit organizations, or government resources.

Down payment assistance programs often determine eligibility based on the borrower’s income and property ownership. For example:

• Income Eligibility: Some homebuyer grant programs prioritize individuals and families with lower incomes. These programs may have specific income limits or guidelines that applicants must meet to qualify. Income limits can vary depending on the program and the area.

• Property Ownership: Typically, grants offer assistance to first-time homebuyers and those purchasing a primary residence. These are generally not available for investment properties or second homes.

Can you avoid or negotiate them down?

While you can’t completely avoid origination fees, there are strategies to potentially reduce or negotiate these costs.

First, shop around and compare loan offers from different lenders. Ideally, you should get quotes from at least three lenders (credit unions, banks, online lenders, mortgage companies). This way, you can find the most competitive terms and potentially pay a lower origination fee.

Also, don’t hesitate to negotiate with lenders. You can leverage multiple loan offers to see if they’re willing to reduce or waive this fee.

Lastly, consider different loan types. Government-backed loans like FHA or VA loans often have more favorable fee structures compared to conventional loans.

The bottom line

While origination fees might seem like an unnecessary added expense when getting a mortgage, they help cover the costs lenders incur during the loan application process.

This fee structure can vary from lender to lender, so it’s important to be proactive. Get multiple quotes from different lenders, ask questions, compare costs, and if possible, negotiate the origination fee.

If you’re ready to get started and potentially save a significant amount of money by reducing your upfront costs, reach out to a mortgage professional today.