So you’re getting a mortgage, and you see the largest fee is for loan origination.
But what is a loan origination fee?
And why does this fee vary from lender to lender?
This article will explain what a loan origination fee is and how you can negotiate to get the lowest fees on your mortgage loan.
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What is a Loan Origination Fee?
The origination fee is an upfront fee charged by lenders for processing a new mortgage loan application. Basically, it is the commission the lender/loan officer receives for putting together and processing your mortgage.
The loan origination fee is expressed as a percentage of the loan amount, typically between 1% – 2% of the total loan amount. It may also be expressed as points; a mortgage point is equal to one percent interest.
1 point = 1%
It is a part of the loan’s closing costs and may include other fees such as loan application fees, credit reports, surveys, etc.
For example, if a mortgage loan is for $200,000 and the lender charges a 1% origination fee (1 point), the origination fee is $2,000.
How to Negotiate a Lower Loan Origination Fee
Shop Multiple Lenders
Like interest rates, origination fees will vary depending on the lender. You should always shop and compare rates and loan offers from at least 3-4 different mortgage companies before choosing a lender to work with.
Not only will you be able to find a loan officer you’re comfortable with, but you will also be able to compare various lender fees and interest rates to ensure you get a competitive deal. The origination fee will be outlined in the loan estimate from a lender, so it is easy to shop for a lender with the lowest loan origination fee.
You can use quotes from one lender to negotiate a lower rate or lender fees. Most everything is negotiable; at least it doesn’t hurt to ask.
Increase Your Credit Score
Your credit score is not only directly related to the interest rate a borrower will receive on a mortgage; it will affect lender fees as well. The lower your score, the higher fees the lender will charge because the loan is riskier, and risky loans mean high lender fees.
There are several things borrowers can do to increase their credit score before selecting a lender. Paying down credit card balances is one of the most common ways to improve your score quickly. Read our article “Tips to improving your credit score fast” for more credit tips.
Other Costs Associated with Getting a Mortgage
- 2 months of reserves in savings
- Closing costs
- Home inspection (not required)
- Loan origination charge
- Home Appraisal
As you know, by now, there are many other costs involved when buying a home. First, you have the down payment, which will depend on the type of home loan you get. FHA loans require just a 3.5% down payment, while conventional loans may require up to 20% down.
You will also need to have 2-3 months of cash reserves. Lenders do not want to make a loan to someone who has to spend their entire savings to get the mortgage.
A home inspection is not required but is highly recommended. It can be quite costly, moving into a home that is full of problems. This could end up costing your thousands, so don’t skip the inspection.