Loan Origination Fee

Loan origination refers to the initiation and completion of the home loan process, which begins when a borrower submits their financial information to a bank or mortgage lender for loan processing.

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).

Either way, their main job duty is to get you in the door and persuade you to apply for a mortgage with them, whether it be a purchase money mortgage or a refinance.

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

origination charges

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.

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.

Tip: Don’t confuse loan origination charges with discount points, the latter being what you pay if you want to buy down your mortgage rate, which is totally optional.

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33 Comments

  1. Tom August 2, 2013 at 7:58 pm -

    Good summary – I guess this explains why they’re able to charge a fee for it.

  2. Wes September 17, 2013 at 1:37 am -

    I wasn’t charged a loan origination fee, but I was charged more than $1,000 for loan underwriting and processing. Is that basically the same thing, just a different way of labeling it?

  3. Colin Robertson September 17, 2013 at 8:55 am -

    It can be. If the combination of all those fees appear on line 801 of the HUD-1, under “Our origination charge,” that’s basically what they’re charging to originate your loan.

  4. Dave October 22, 2013 at 9:17 am -

    Perhaps you can answer a question. I bought the house 4 months ago (6/17) and want to pay it off before six months (12/17) since I sold the other house. The mortgage broker called to say he would have to refund the origination fee to the lender in that situation and wants me to wait until after six months to pay it off. Costs me additional interest, of course. Is this common? Would it be fair to ask broker to reimburse the interest I would have to pay if I wait? There is no prepayment penalty on the loan. The origination fee was 1.75% of the loan.

  5. Colin Robertson October 23, 2013 at 2:48 pm -

    It is standard industry practice for mortgage broker agreements to include something about compensation recapture for early loan payoff. I’ve seen some that say 120 days and others that say 180 days. You just never hear too much about it because most people hold their loans a lot longer than six months.

  6. Lynell March 3, 2014 at 6:23 am -

    They sure make the origination fee confusing for as much as regulators have professed to making the form “more clear.” This is about the most confusing, non-straightforward thing I’ve ever seen.

  7. Colin Robertson March 3, 2014 at 9:33 pm -

    Just focus on your interest rate and what you actually pay out of pocket.

  8. ela May 7, 2014 at 4:38 am -

    i signed for a loan what happened to be not eligible to take for the affordable property. it was offered by a bank and they charged me 495$. they said it was but finally the processor found out it wasnt. why did they take my money if it wasnt even my knowledge to know it and also i already paid for termite inspection what was mandatory with that loan

  9. Colin Robertson May 7, 2014 at 10:27 am -

    Ela,

    I’m assuming the $495 fee was for the appraisal?

  10. Gaby June 25, 2014 at 12:19 pm -

    Is there a cap a broker can charge for an origination fee?

  11. Colin Robertson June 25, 2014 at 10:40 pm -

    Gaby,

    There are caps depending on the loan type and the lender they’re working with, along with their chosen compensation plan, but generally the fee ranges from 1-2%.

  12. dave June 29, 2014 at 5:40 pm -

    our Indiana based mortgage broker provided a form stating that their compensation is paid by the lender.

    They list a $4646 loan origination charge and then a $7188 credit for a difference of $2542 on the good faith estimate.

    how can they charge us an origination fee if their compensation is being paid by the lender or are these two different fees?

  13. Colin Robertson June 30, 2014 at 8:21 am -

    Dave,

    They have to show you their fee, even if it’s actually being paid by the lender.

  14. Ed June 30, 2014 at 1:10 pm -

    Today I asked a couple of questions to my mortgage broker about the origination points and that this is the best option to follow. And I understand why he would try to convince me. But he also send me a similar estimate for the same house but with 0 origination points and lower interest rate, but with Mortgage insurance which makes my monthly payment higher. Is the second scenario possible? If it is then who pays the borker if their payment is the origination points?

  15. Colin Robertson June 30, 2014 at 4:43 pm -

    It’s possible that a lower interest rate can have a higher overall payment if there is expensive mortgage insurance involved. And you don’t necessarily have to pay any origination fees out of pocket because banks/lenders pay brokers for giving you a slightly higher interest rate (which you pay over the life of the loan).

  16. Heidi July 15, 2014 at 2:28 pm -

    We are getting a mortgage on a house we already own. The mortgage person is asking for a deposit of $500 before they do any work and said it will only be taken if we don’t go with them. At what point do you typically make deposits or monetary promises with a mortgage company?

  17. Colin Robertson July 15, 2014 at 4:07 pm -

    Heidi,

    It’s probably a deposit for the appraisal, which they will eventually order, but if you don’t close with them it’s essentially paid for and lost. The problem with these upfront application fees is that once they’re charged, borrowers feel trapped to continue on with the lender and can’t really shop around. And if the loan is denied you’re often out of luck. You should ask them what’s it for and read accompanying paperwork before taking any action, and/or shop around and find lenders willing to do some more work before asking for any fees.

  18. Shay July 25, 2014 at 2:12 pm -

    Colin,

    I just met with my loan officer to discuss my pre-approval. I am looking to buy a 175k home. The interest rate she gave me was 5.25% (coventional and somewhat unusual loan due to my circumstances) but with no PMI. Her brokerage fee was as follows: Orignation $2500, Underwriting $895, and Processing $695 for a total of $4090. This will be my first home and as much research as I’ve done, I don’t want to be ripped off. Does this sound about right? The fee is due to her 10 days before closing. Also, do I owe her anything if I decide to hold off on buying altogether?

  19. Colin Robertson July 25, 2014 at 3:46 pm -

    Shay,

    I don’t know the loan amount or the loan program, but I’ll assume a 30-year fixed and 10% down. Those lender fees, $4,090 divided by $157,500 amount to a total percentage of about 2.6%. The origination fee is nearly 1.6% of the hypothetical loan amount, coupled with a relatively high interest rate set at 5.25%. You might be able to shop and get that down to 1% with similar or even lower uw/processing fees (and even a lower rate). I can’t tell you definitively if it’s a good deal or bad (I don’t know all your details), but you should get a few quotes from other brokers/lenders to determine what’s a fair deal for your exact situation. Good luck on your first purchase!

  20. Katherine August 4, 2014 at 2:20 pm -

    I have received several Good Faith Estimates as the loan did not get processed in the rate locked in period. The origination charge on the estimates went from $1804 to $4917. When I asked the agent about the increase, he stated that the increase was due to the rate extension that he was going to credit back to me. That credit is for $1810 only. Now he is saying the remaining increase is because of translation costs. Shouldn’t he have explicit disclosed the cost to me? Is the GFE go enough? What recourse do I have?
    Thanks.

  21. Sheila August 15, 2014 at 4:17 am -

    My issue is similar to Katherine’s. I received a Good Faith Estimate at the beginning and a guarantee that the lender would pay closing costs (this is a refi). About a month later, I received a new Good Faith Estimate that had more than tripled the origination costs and had also increased the third party costs by more than 12%. Can they do that?

  22. Colin Robertson August 15, 2014 at 10:34 am -

    Sheila,

    Are they still paying all your closing costs? Did you ask why the costs went up? If your interest rate is the same and your actual out-of-pocket costs are the same, it might not be an issue. But if you’re paying more than originally quoted, there should be a valid reason. Generally, “our origination charge” (block 1) should not change.

  23. Manish September 23, 2014 at 9:59 am -

    Thanks for sharing your knowledge with everyone.

  24. Diego September 26, 2014 at 1:48 pm -

    Hi Colin,

    My broker has change the terms of my loan 3 times on the last 6 months. This means from 30% as down payment and 12 months as a reserve. Then, he said it will be 35% with no deposit. Then, 40% and then 40% as a down payment plus 6 months of mortgage. Do I need to pay any penalty if I decide to change lender/ broker?

  25. Colin Robertson September 26, 2014 at 3:29 pm -

    Diego,

    If you don’t want to use that broker anymore, you can shop around, but note that there might be non-refundable costs you already paid. Alternatively negotiate with the guy to get his act together OR you’ll go elsewhere.

  26. MIG October 7, 2014 at 7:57 am -

    I’M in the process of buying my first home. The GFE I received from the broker is completely different from , what the lender sent me. Stating change in circumstance. Based on appraisal, can they do this.

  27. Colin Robertson October 7, 2014 at 9:25 am -

    Carefully inspect what changed and why…a low appraisal could certainly change a lot of things. But make sure it all adds up.

  28. MIG October 14, 2014 at 5:03 am -

    Thank you for your answer to my question…but the appraisal was higher than what I am paying. Now the seller has changed the closing date stating this new property not ready. Is there anything I should be worried about.

  29. Colin Robertson October 14, 2014 at 9:21 am -

    Your purchase price should be the same regardless of appraisal coming in higher. A later closing date could affect your lock if you already locked your loan. Or if you’re not locked, you’ll need to consider interest rate movement and determine the right time to lock.

  30. mike November 14, 2014 at 5:49 pm -

    We are buying a new home in a CA subdivision and it would appear that we are locked into using their lender… but I wonder what we have agreed to. Here is the language in their disclosure…??

    “2. Multiple Loan Applications – Until the Lender notifies the Borrower of its final decision on whether to originate the Loan, the Borrower agrees not to make a mortgage loan application with another lender to finance the purchase or refinance of the subject property covered by this Lock-In Disclosure/Agreement.”

  31. jane November 17, 2014 at 7:24 am -

    Hi Colin,

    We locked our rate at the beginning of our application process. We’ve now received four different GFEs with higher and higher origination fees and points each time. We thought that, once locked, these shouldn’t change. Is this correct?

  32. Colin Robertson November 17, 2014 at 9:30 am -

    Jane,

    A “changed circumstance” (different loan amount or property value or credit quality of borrower) may allow the originator to issue a revised GFE, but the increased charges should only result from the circumstance that changed.

  33. Colin Robertson November 17, 2014 at 3:09 pm -

    Mike,

    I suppose that depends on what they actually mean by final decision. Do they consider loan approval to be the final decision? And what are the repercussions? Might want to ask for clarification.

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