Definition:
An origination fee is a charge by a lender for processing a new mortgage loan. It covers the lender’s administrative costs and is usually expressed as a percentage of the total loan amount.
Example:
Natalie takes out a $250,000 mortgage. Her lender charges a 1% origination fee, which means she pays $2,500 at closing as part of her loan costs.
Explanation:
The origination fee is a one-time fee paid at closing, and it’s part of a borrower’s total closing costs. It compensates the lender for setting up and processing the loan. This includes reviewing the application, verifying income and credit, and preparing documents.
Origination fees typically range from 0.5% to 1% of the loan amount but can vary depending on the lender and the borrower's credit profile. In some cases, borrowers may negotiate a lower fee or choose a no-fee loan with a slightly higher interest rate instead.
The fee may appear on the Loan Estimate or Closing Disclosure under names like:
- Origination fee
- Underwriting fee
- Processing fee
While it's not always labeled “origination fee,” it's important for buyers to understand the cost and what it covers.
Why is Origination Fee Important in Real Estate Transactions?
The origination fee is important because it affects how much cash a buyer needs to bring to closing. Understanding this fee helps buyers compare loan offers and choose the most cost-effective option. For sellers, a well-prepared buyer who knows their closing costs is more likely to complete the transaction smoothly. Being aware of the origination fee ensures buyers are financially ready and avoid surprises at the closing table.