Depending on documentation type, a borrower will have to supply certain credit, income, asset, and employment information to a specified bank or lender to initiate the underwriting of the loan application.
Along with that, the borrower will have to sign forms that allow the mortgage broker (if applicable) and bank or lender to pull a credit report and release information about the borrower.
Once the information is submitted to the appropriate bank or lender, an underwriter will decision the application, either approving, suspending, or declining the loan.
To sum it up, loan origination is simply the creation of a mortgage. It may begin with a phone call, an e-mail, a mortgage rate quote, or a referral from a real estate agent.
Loan Originators Are Salespeople
So who’s behind all this loan origination anyways?
Well, loan originators of course. They’re also known as loan officers, mortgage brokers, loan specialists or simply salespeople. Or some other cute name a company comes up with like “loan hero” or “loan scientist.”
These originators may work on behalf of individual mortgage brokers, or for large retail banks that originate thousands of mortgage loans each month. (See mortgage brokers vs banks).
Now this isn’t to say that they’re pushy salespeople, it just means their highest priority is “getting a sale.”
They can also be quite helpful in guiding you through the home loan process, largely because both your incentives and theirs are aligned. You want your loan to close and they get paid when it does. So everyone is on the same page.
Breaking Down the Loan Origination Fee
This is a screenshot of an actual Good Faith Estimate, which displays the adjusted origination costs.
The fees associated with the origination of a loan are called, you guessed it, loan origination fees. They are typically broken down into mortgage points, which are expressed as a percentage of the loan amount. So if the loan amount is $100,000, and you see a $1,000 loan origination fee on the paperwork, the bank or broker is charging you one (1) mortgage point.
This “loan origination fee” is paid to the loan officer or broker who initiates and completes the loan transaction with the borrower, and is only paid out if and when the loan funds. This fee is basically the originator’s commission for getting you a loan. Some originators may tell you that it is paid to cover loan processing/application costs, though it’s pretty common to pay those AND the loan origination fee. Go figure.
In the example above, the loan origination charge is $1,840 on a $348,000 loan amount, which makes the fee roughly half a percentage point (.50%). This particular broker charged a $250 origination charge, a $695 processing fee, and an $895 underwriting fee, which combined make up the $1,840 total. Note that these fees are represented as one lump sum on the Good Faith Estimate, so ask for a breakdown to see what you’re actually being charged. Or refer to your Fees Worksheet.
The corresponding Fees Worksheet pictured above breaks down the origination charges. Although not pictured here, lenders typically display a percentage on the same line as the Loan Origination Fee, such as 1.000%, if applicable. This will give you a better idea as to what you’re actually being charged.
Now let’s refer to the top screenshot again. Our borrower also received a lender credit of $3,076.32, which offset the entire origination charge and more, resulting in an adjusted origination charge of -$1,236.32. This amount was put toward other closing costs, reducing the borrower’s out-of-pocket expenses.
Average Loan Origination Fee
In the mortgage world, it’s hard to provide universal answers, seeing that mortgages can differ tremendously. The loan origination fee can vary based on who you decide to work with, and how complicated your loan is. If you’ve got a cookie-cutter loan that you can get anywhere, this fee should be low. The opposite is also true. Either way, the loan origination fee is negotiable! And it can be offset using a credit, as seen above.
If I had to throw out a number, I’d say the most common origination fee is 1% of the loan amount, which many banks will include in the fine print next to their advertised rates. Wells Fargo used to include this exact disclaimer on their mortgage rates page, but it has since been removed.
Also note that for smaller loan amounts, a larger loan origination fee will need to be charged, seeing that it’s expressed as a percentage and won’t go nearly as far as a similar percentage on a large loan.
Brokers and banks may not even charge a loan origination fee directly to the borrower, depending on the terms of the deal. A true no cost loan doesn’t include a loan origination fee paid for by the borrower because it’s an out-of-pocket expense.
However, this means your interest rate will be higher as a result (lender-paid compensation), all else being equal. Loan originators have to make money somewhere, so if it’s not being charged on the front-end, they’ll make up for it on the back-end.
Either way, all fees should always be fully disclosed on the Good Faith Estimate and HUD-1. Pay close attention to this figure to see exactly what you’re being charged, whether paid out-of-pocket or via a higher-than-market interest rate. Most upfront banks and brokers will charge 1-2% of the loan amount, although this can vary. If you shop around, you may be able to avoid the loan origination fee altogether, and get that low rate you’re after!
Lastly, compare the origination charges, all lender fees, AND your interest rate among different banks and lenders to get the complete picture. Looking at just one or two of these figures won’t provide an accurate assessment.