What Is An Origination Fee And What Is It For?

Whether you’re in the market for a mortgage, securing funds for your education or in need of extra cash to navigate financial hardship, there are many factors to consider when applying for a loan. Understanding the fees associated with these loans, such as the origination fee, can empower you to choose the right loan and lender for your needs.

In this article we will explore the basics of origination fees, why they’re important and how much you can expect to pay.

What Is A Loan Origination Fee?

An origination fee is a fee charged by the lender for issuing a loan or mortgage. It covers the cost of processing the loan application, underwriting and financing the loan, as well as other services.

Depending on the lender and type of loan, origination fees may be bundled into one charge or listed separately as application, processing or underwriting fees.

When buying a home, a mortgage origination fee is usually paid as a part of closing. Closing costs and origination fees are separate from your mortgage down payment.

What Do Origination Fees Cover?

Origination fees cover the services provided by the loan lender, including but not limited to:

• Loan processing: This includes reviewing your application and preparing loan documents.
• Underwriting: During this time, the lender is procuring and verifying background information to ensure you qualify for the loan, including checking your credit score.
• Loan Funding: Higher application fees are one way you could secure the funds needed for your loan if you do not meet other financial requirements.

Average Cost Of An Origination Fee

Origination fee costs can vary depending on the type of loan. For instance, Federal Student Loans have set origination fees that are consistent across the board, while the fees for mortgage and personal loans are determined by the lender.

The average mortgage origination fee is between 0.5% and 1% of the total loan amount. For example, a lender would make $1,000 on a $100,000 loan if they charged a 1% origination fee. However, there are several other factors that play a role in determining your exact fees.

What Factors Can Impact An Origination Fee?

Each lender uses a slightly different set of criteria to determine origination fees. The length, amount and reason for the loan is taken into consideration, while the largest contributing factor is the borrower’s credit score.

Lenders consider the overall score, payment history and any co-signers to evaluate potential risk and set fees. A credit score of 670 or higher is considered “good,” while 740 or higher is “very good” and 800 or higher is “exceptional.” In general, borrowers with higher credit scores will pay less in origination fees.

Mortgage Points And Origination Fees

Mortgage points, or discount points, allow you to lower your interest rate by paying an additional upfront fee in your closing costs. One prepaid point is equal to 1% of the loan amount, but you can buy points in increments as low as 0.125%. This option can be helpful for home buyers looking to lower their monthly payments.

Can I Avoid An Origination Fee?

If you’ve made it this far, you might be wondering how to avoid origination fees altogether.

Almost all origination fees can be negotiated with your lender, but it is important to understand that some charges are needed by the lender in order to process your loan. This is the reason mortgages with lower or no origination fee typically have higher interest rates.

Certain qualifications, such as excellent credit or high income, may give you additional leverage to negotiate origination fees. Although this could mean less money due upfront, it could also mean you’ll pay more in interest over the lifetime of the loan. Be sure to set yourself up for success by considering what’s most important to you before beginning negotiations!

The Bottom Line

Loan origination fees are complicated, and because each lender calculates the details differently, it is imperative that you consider all costs when comparing loans. Don’t be afraid to ask your lender how your fees were determined or what other payment options may be available to you.

In the market for a mortgage? Visit our Learning Center to learn more about the home buying process!