What is an origination fee?

Understanding origination fees

Origination fees pay for the services provided by your mortgage lender, including administrative tasks, paperwork and the underwriting process. They may also include other charges, such as mortgage points.

When you purchase a home, origination fees are usually included in the closing costs, which you can find in your loan estimate statement. The loan estimate may also break down each service included with the origination fee so you can see exactly what you’re paying for.

Origination fees are typically between 0.5% and 1% of your total loan amount.

» MORE: How much are closing costs?

What’s included in origination fees?

An origination fee is a flat fee charged for a variety of services that the lender provides, including:

• Handling loan documentation and processing your loan: Mortgages require quite a bit of paperwork to keep things compliant, and your lender is in charge of all of that. The origination fee covers the time and expenses spent processing these documents.
• Verifying your financial information (income, debts, etc.): Lenders need to verify your financial information in order to qualify you for the mortgage.
• Managing loan meetings and scheduling: There may be several meetings, phone calls and other forms of communication with your lender throughout the loan process.
• Loan underwriting: In addition to checking your income and assets, the underwriter needs to verify that the home meets the loan requirements and is valued properly.
• Points: Some lenders include prepaid interest points as part of their origination fee.

How much are origination fees?

An origination fee is typically a flat fee that equates to a percentage of your total loan. The Truth in Lending Act helps limit origination fees charged by lenders.

Most lenders now charge between 0.5% and 1% of the loan amount. This means that an origination fee would be around $2,000 to $4,000 for a $400,000 mortgage.

In addition to the flat fee, if you pay for mortgage points to lower your interest rate, this may also be listed as part of the origination fee. Points are prepaid interest on your mortgage. One point typically costs 1% of the loan amount and is worth a 0.25% interest rate reduction on your loan.

If you don’t see any origination fee on your loan estimate or closing disclosure, your lender may have just called it something else, such as a “processing fee.” You are still paying the fee; it is just called a different name.

Negotiating origination fees

There are ways to avoid paying origination fees on your loan, and some lenders even advertise “no origination fees” for either purchasing a new home or refinancing an existing mortgage. But while you can avoid paying an origination fee at closing, the lender will make money on your loan in other ways. And sidestepping an origination fee may end up costing you more in the long run.

Lenders may charge high interest to make up for no origination fees. Compare fees and rates before you sign.

If you want to avoid paying origination fees, you can ask for a lender credit, which is essentially a negative mortgage point. But this results in a higher interest rate, which may cost you more over the life of the loan. Even if you’re not using lender credits, the same fundamental tactic may be used by lenders that technically don’t charge origination fees.

Jay Sobo, founder and CEO of Liberty Financing, advises borrowers to be careful with no-origination-fee loans.

“These fees can also be baked into the rate and cost of the loan,” said Sobo. “This may avoid paying origination fees upfront but could increase the total cost over the life of the loan. While mortgage brokers are limited to 2.75% in total fees charged as origination, lenders are permitted to collect well over 3% built into the backend of the loan.”

When you shop for a mortgage lender, be sure to compare the interest rate against any promises of low or no fees.

Another way to avoid paying an origination fee is to negotiate for the seller to pay closing costs. Some sellers may be willing to cover closing costs as an incentive to close the deal, especially if it’s a slow market.

» MORE: How to negotiate your mortgage closing costs

Other fees worth noting

While your origination fee is one of the larger mortgage fees, there are other fees you should be aware of that can add up to higher closing costs.

• Appraisal fee: Before a home is eligible for sale, a licensed professional must determine its market value. The appraisal includes an inspection of the property, a comparison with other home values in the area and a final report. The buyer typically pays the appraisal fee.
• Title insurance: Title insurance can protect the lender and borrower from problems related to contested legal ownership of a property. Possible issues with a title include back taxes, liens or unsettled wills from previous owners. The insurance premium is paid at closing.
• Assignment recording fee: Real estate transactions are required to be part of public records. The assignment recording fee pays for a government agency to register the sale of real estate.
• Tax service fee: A mortgage lender hires a tax service agency at closing to research a property and determine if it is free of outstanding taxes and other impediments. If delinquent taxes exist and the buyer defaults on the loan, preexisting tax liens allow the state to seize the property, and the lender would have no access to its collateral. The lender usually passes this charge on to the borrower.
• Credit report fee: The credit report fee covers the cost the lender pays to obtain a copy of your credit report during the loan approval process.
• Flood certification: A flood certification is a document that states the flood zone status of a piece of real estate. If a home is determined to be in a flood zone, flood insurance might be required to complete the loan. Lenders typically partner with a specialist to assess flood maps, and the fee for this is passed on to the borrower.

Bottom line

An origination fee is charged by lenders for the services they provide, and the fee is assessed at closing. Origination fees can be waived, but that usually results in a higher interest rate, which can end up costing a borrower more money in the long run. Your best bet for avoiding a mortgage origination fee is to have the home seller pay for your closing costs.

No matter who pays for the fees associated with your home purchase, make sure to understand all the fees assessed on your closing disclosure before signing on the dotted line.