What is a Loan Origination Fee?
A loan origination fee is a charge by a lender for processing and underwriting a new mortgage loan. It covers the lender's administrative costs of evaluating the borrower, verifying documentation, and funding the loan. Origination fees typically range from 0.5% to 1.5% of the loan amount. On a $250,000 mortgage, a 1% origination fee costs $2,500.
The origination fee is disclosed on the Loan Estimate (LE) provided within three business days of loan application and confirmed on the Closing Disclosure (CD) provided three days before closing. It appears in Section A of the closing costs, labeled as origination charges. Unlike third-party fees, the origination fee goes directly to the lender.
Origination fee vs. points
Origination fees and points are both expressed as percentages of the loan amount, but they serve different purposes. The origination fee compensates the lender for loan processing. Discount points are optional prepaid interest that buys down the interest rate. You must pay the origination fee (though it is negotiable). Discount points are always optional.
On the Loan Estimate, origination fees and points are listed separately so borrowers can distinguish between the cost of getting the loan and the cost of buying a lower rate.
Negotiating origination fees
Origination fees are negotiable. Shopping multiple lenders and comparing Loan Estimates is the best way to reduce this cost. Some lenders advertise "no origination fee" loans but compensate by charging a higher interest rate. Compare the total cost of borrowing over your expected holding period, not just the upfront fees.
Origination fees and investors
For investors using hard money loans, origination fees (often called "points" in hard money) are typically 1-3 points, significantly higher than conventional loans. This is a major cost factor for flip investors who use leverage. Multiple origination fees per year on consecutive flips compound quickly. When calculating MAO, include financing costs in your expense assumptions.