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Your Loan Origination Fee Explained

August 20, 2021

7 MINUTE READ

When you apply to buy a home, you will likely have to pay a mortgage loan origination fee. This fee is usually a set amount based on the services needed from your lender to help you complete the purchase.
But, what is a loan origination fee, exactly? Do you need one? How do they work? How much are loan origination fees? And how do you get the best deal?
Fear not! We’re here with all the information you need to make your loan origination fee easy to understand.

What is an Origination Fee and Why Do Lenders Use Them?

A mortgage origination fee is the same as the processing, administrative, or underwriting fees you’d incur on any other type of personal loan. It’s essentially an upfront fee charged by the lender to cover the costs of processing a new loan on your behalf. In the U.S., a lender origination fee on mortgages typically range between 0.5% and 1% of the entire loan.

Lenders use loan origination fees to recoup the costs of issuing your loan, including vetting procedures, processing your application, verifying your income and employment history, preparing your loan documentation, and any other miscellaneous costs.

How Does an Origination Fee Work?

The loan origination fee for your mortgage works in the same way as any other commission payment on a loan. For example, based on a 1% rate, your lender would take $1,200 on a $120,000 loan, $1,500 on a $150,000 loan, and so on.

Determining the Cost

The exact criteria that determine the costs of your origination fee will vary from lender to lender. But common considerations include the amount of the loan, the length of the loan, your credit score, credit history, and the credit scores and credit histories of any co-signers.
It’s important to note that while the average loan origination fee sits between 0.5% and 1% of the total loan value, the percentage can be higher on smaller mortgages. This is because the background work that the lender completes may take the same amount of effort and time on a $60,000 loan as it would on a $300,000 loan.
Prepaid points also factor into the cost. You may often come across the terms discount fees or points when looking into a loan origination fee. Borrowers can prepay interest points in increments of 0.125 upwards and use them as credit towards a lower interest rate. One interest point is equal to 1% of the total sum of the loan. If you go down this route, any prepayments you have made should be included with the origination fee definition and breakdown on your final loan estimate.

Payment Schedule

It pays to double-check payment schedule procedures when approaching lenders to make sure you get the best option for you. How you pay your origination fee is typically stipulated by the lender, and there are three main options:

  • Pay the fee in cash at closing – Keep in mind this is already an expensive time in the process as you also have your down payment and title costs to pay. So it’s important you have budgeted enough to cover the lender origination fee too.
  • Include the fee in the repayment structure of your mortgage – Just be aware that this may lead to a higher overall interest rate on your repayments.
  • Deduct the fee from the total amount of your loan – This may mean you are a little more restricted at the top end of your budget for the value of the home you want to buy.

Buyer Beware! Be wary of any loan scheme that asks for fee payments before your loan has been granted. The Federal Trade Commission stipulates that legitimate lenders should clearly outline their fees, which should only be payable after the loan has been approved.

Saving on Your Origination Fees

If you can afford it, the most cost-effective strategy is to pay your origination fee and other closing costs upfront. This way, you know exactly what you’re spending, plus you’ll get a lower rate as no additional interest payments are involved.
Paying fees to lenders at all is largely unavoidable. Still, even if you can’t pay everything in one go, there are ways you can reduce spending by making savings on your mortgage origination fees and closing costs.

Researching & Comparing Lenders

Not all lenders are equal. By shopping around and comparing annual percentage rates between different loan options, you can calculate the best option for the overall total cost. But, make sure the loan options you are comparing are the same. For example, the rate on a 25-year fixed rate mortgage will be different from that of a 10-year adjustable rate mortgage.

Negotiating

In some situations, it is possible to negotiate with either the lender and the seller to save on your loan origination fee.

  • If the seller is in a rush to close or the home has been on the market for a long time, you may be able to negotiate to have them pay some – or even all – of your loan fees. If you do this, you’ll need to make sure the agreement is formalized in your purchase agreement.
  • If you have shopped around and found a preferred lender, but they are not the cheapest option, you can negotiate with them to price match or better the existing offer.
  • If you have an excellent credit score and are borrowing a significant amount over an extended timeframe, you may be able to leverage a deal from your lender for a reduced origination fee.
  • Be diligent about checking what is included in your fee. For example, if additional charges like processing fees have been bundled in, you could request that these are waived.
  • If your budget is tight now but will be more financially stable after the sale is complete, you could ask for a lower fee in exchange for a slightly higher interest rate on the repayments.

Tax Deductions

Check to see if your mortgage origination fee is tax-deductible. IRS guidelines state that this can sometimes be the case, although some specific stipulations and criteria need to be met.

Gifted Funds

It is possible to pay for your origination fee and other closing costs with gifted money from a family member. Some lenders may allow gifted funds from friends, employers, labor unions, nonprofit organizations, and government agencies. But it must be a gift, not a loan, meaning a written statement is required to confirm that there is no obligation on your behalf to repay the money.

What Does It Mean When a Loan Has No Origination Fee?

Some lenders try to reel in buyers by advertising loans with a promise of no origination fees. However, this rarely means that you are getting something for nothing.
In ‘no fee’ situations, the lender is most likely factoring your mortgage origination fee into the repayment agreement, which will increase your interest rate. This is a good strategy for lenders, as it allows them to make more money when your loan is sold on to mortgage investors.
If the loan you are being offered has no fee and there is no difference in the interest rate, there could be other explanations:
Rate Lock – Rate lock fees are applied to fixed-rate loans to protect the lender against interest rate rises.
Commitment fee – Some lenders charge a commitment fee to guarantee that the total amount of the loan will be available to the buyer if the sale goes through.
Underwriting/ Processing fees – Essentially, these are just origination fees with an alternative name to cover the costs of setting you up for the mortgage.

Getting the Best Mortgage Rates

Regardless of which option is best for you when it comes to fees, there are many other general tips we can give you to get the best rate on your mortgage. These include:

  • Checking your credit score and working to improve it. As a result, lenders are understandably more confident lending to lower-risk buyers.
  • Saving up a bigger down payment. This may help you negotiate a smaller lender origination fee, and it will also reduce the overall interest you pay on your loan.
  • Increase your income and decrease your debt. If vetting indicates you are reliable financially, you may be able to barter for a lower rate.
  • Keep an eye on mortgage rates, as they fluctuate constantly. Ask your lender to lock in a rate when they move in your favor.
  • If you’re buying your first home, find out if there are any programs that you are eligible for to make the process less costly.

Work with Reali

When you purchase your home through Reali, you’ll have a dedicated home loan officer to guide you through the entire process. Our application evaluations are quick, secure, and hassle-free, and our online dashboard helps you track every stage of progress.

Contact our team today for a customized quote. We have multiple loan options available!