Understanding Loan Origination Fees

What Are Loan Origination Fees?

A loan origination fee is an upfront fee charged by a lender to cover miscellaneous costs of making a loan. These might include preparing loan documents, processing your loan application and underwriting the loan (that is, checking your credit to make sure you qualify for the loan).

Some lenders break out fees for preparation, processing and underwriting separately; others lump them all into the origination fee. Auto loans, mortgage loans, personal loans and student loans often have origination fees. Depending on the type of loan, origination fees may be due upfront as part of your loan closing costs, deducted from your loan proceeds or rolled into the total loan balance to be paid off over time.

Origination fees are set before you ever take the loan. If you apply for a mortgage, for example, the lender is required by law to give you a loan estimate that includes information about the cost of your loan, including origination fees and other closing costs.

Average Cost of Origination Fees

Origination fees, generally quoted as a percentage of the total loan amount, vary widely. Federal student loan origination fees are set by Congress; fees for most other loans vary depending on the lender, the type of loan you're getting and your creditworthiness. For example, origination fees on a mortgage loan can be less than 1%, while origination fees on personal loans may be as high as 8% depending on your credit score.

While a lower origination fee may sound like a good deal, it's not always your best option. Because origination fees help compensate lenders for making the loan, you might find that a loan with a lower origination fee makes up for it with a higher interest rate. Especially when taking out a large long-term loan such as a mortgage or student loan, a loan with a lower interest rate is usually a better bet, even if it has a higher origination fee. Even a small increase in your interest rate can add up to thousands of dollars over the life of a large loan.

How Does a Good Credit Score Impact Origination Fees?

Having a good credit score can make it easier to get approved for all types of loans. It may also spur lenders to offer you a lower origination fee to get your business.

What constitutes a good credit score? Lenders may use different credit scoring models, some specifically designed for their industry, and each lender has its own criteria for determining if you're creditworthy. However, a FICO^® Score^☉ of 670 or higher is generally considered "good," 740 or higher is "very good" and 800 or higher is considered "exceptional."

How to Minimize Origination Fees

Origination fees are set by lenders, and there's no rule that dictates how much they should charge or even requires an origination fee in the first place. As a result, you may be able to get a lower fee than you're originally quoted. (The only exception is federal student loans, whose fees are not negotiable.)

Legitimate lenders disclose their fees upfront; if you're not happy with the quoted origination fees, here are some ways you can try to lower them.

• Negotiate. If you have good to excellent credit, you may be in a position to negotiate a lower origination fee. Keep in mind, however, that this generally requires a tradeoff. To get a reduced origination fee, you may have to agree to a higher interest rate or a longer loan term—both of which typically increase the overall total cost of the loan.
• Shop around. Before applying for a loan, compare various lenders' average origination fees. Lenders sometimes offer low or no origination fees to make their loans more appealing to borrowers. However, be sure to consider interest rates, loan terms and other fees—not just origination fees—to evaluate the overall cost of the loan.
• Ask for seller concessions. If you're buying a home, see if you can get the seller to pay your origination fees. This tactic works best in a buyer's market in which home sellers are having problems finding buyers.
• Get lender credits. Mortgage closing costs can run into several thousand dollars. Some mortgage lenders offer credits to cover these costs. The amount of the credits is rolled into your mortgage balance. You'll pay higher interest rates in return for lender credits. However, depending on the size of your mortgage, it may be advantageous to put the money you would have spent on closing costs toward your down payment instead.

Additional Loan Fees to Look Out For

Origination fees aren't the only loan costs you must take into account before signing on the dotted line. Lenders may charge a wide variety of other fees. These fees differ by loan type.

Mortgages:

• Appraisal fee: The appraisal fee covers the cost of having the property appraised to confirm the loan is big enough to cover the home's value.
• Home inspection fee: Some lenders require a home inspection before they will approve you for a mortgage; you'll pay a fee for this service.
• Title insurance fee: his fee covers the title insurance company's costs to insure the transfer of the deed into your name.
• Recording fee: Mortgage lenders may charge a fee for recording your deed to your new home with local government agencies.

Auto loans:

• Registration fee: When you buy a car, you'll pay a state-mandated fee to register it.
• Vehicle inspection fee: Your state may require inspections to ensure the vehicle meets state standards.
• Destination fee: Sometimes called the shipping fee, this covers the cost of transporting the vehicle to the dealer.
• Preparation fee/dealer fee: Dealers may add in vague fees for getting the vehicle ready for you.

There are also some miscellaneous fees that may be applied to any type of loan:

• Brokerage fee: Loan-matching services may charge a brokerage fee for this service.
• Credit report fee: his fee covers the lender's cost to obtain your credit report and credit score.
• Underwriting fee: This charge is for underwriting and approving your loan application.
• Processing fee: This is a fee for processing the loan.
• Document preparation fee: This covers the preparation of the documents involved in getting a loan.

Before signing any loan documents, make sure to get a detailed breakdown of all the fees you're paying and what each is for. If you see other fees in addition to the origination fee, ask the lender what the origination fee includes to make sure you aren't being charged twice. Don't agree to a loan until you fully understand what each fee is for and how it will be paid.

Know Your Score

Because the costs associated with getting a loan can quickly add up, it's important to pay attention to the details of the loan agreement. Before you start shopping for a loan, get a free copy of your credit report and your credit score to see where you stand and whether you're in a good position to negotiate your origination fees. Understanding your options for handling origination fees will help you choose the best loan for your situation.