For most prospective home buyers, obtaining a mortgage is an essential part of the home buying process. And getting quotes from multiple lenders in order to ensure you secure the most competitive and affordable mortgage possible is nearly as important as searching for a new home.
While mortgage shopping, it’s important to keep in mind that there are a variety of costs tacked onto your home loan by lenders that are known as origination fees. These fees cover the expense of making the loan, and by law, lenders are required to provide an upfront estimate of how much these added charges will be.
What are mortgage origination fees?
Origination fees are costs that a lender charges in order to establish your mortgage. They are part of your loan closing costs as a home buyer and are designed to cover the many administrative costs associated with originating a new loan.
These fees typically include such items as document preparation, underwriting, appraisal costs, credit reports, tax research, and more. In many cases, origination costs amount to about 0.5% to 1% of the loan amount. Though, depending on the lender, they may be less.
“While most of what a lender makes in revenue or profit is on the back-end when the loan is sold in the secondary market based upon the interest rate, that revenue does not cover all the expenses and the profit margins most lenders need to operate,” says Mason Whitehead of Churchill Mortgage. “As a result, it’s necessary to charge some [origination] fees upfront to offset the costs of processing, underwriting, and keeping the lights on.”
Most common origination fees
The exact list of origination fees may vary slightly from lender to lender, and some lenders may use different titles for specific fees. However, some of the most common origination fees generally include:
- Processing or underwriting: This fee is designed to cover the lender’s costs of gathering the required documentation to process your loan.
- Appraisal: As part of the closing process, the home being purchased must be appraised for its fair market value, which is the basis for this fee.
- Credit check: The mortgage lender charges this fee to cover the cost of checking your credit score and profile.
- Tax service processing: This fee is charged by the lender to establish an escrow account that will be used to ensure that there is no interruption in the payment of property taxes as the home changes hands.
It’s also important to note that there are some origination expenses or costs that a lender controls and others that the lender cannot control. For instance, application, processing, and underwriting fees are typically fees controlled by the lender. But credit checks and appraisals are fees charged by third parties and thus are fixed costs that the lender must pay.
Origination fees may sometimes also include what’s known as up-front points, which are not to be confused with the discount points used to buy down the interest rate on a mortgage.
“Up-front points are charged in some files when the lender cannot generate the necessary revenue due to the credit or program type,” says Whitehead. “This is not as common as it used to be, but it does come into play in some cases. Mostly when [a borrower is] using down payment assistance programs.”
Where to look for loan origination fees
Your loan estimate is legally required to detail all of the origination fees that will be added to your mortgage. This should include an estimate of the cost associated with each item.
“You can usually find the breakdown of the fees [in Section A] on page two of the loan estimate where it says ‘Origination Charges.’ These are the fees the lender controls,” explains Whitehead. “Other fees typically grouped in with the lender fees or origination fees are in Section B of the loan estimate. But these are items the lender doesn’t control—such as appraisal, credit report, and attorney document preparation.”
These same fees will also appear on your closing documents and generally are not supposed to suddenly increase at closing, according to the Consumer Financial Protection Bureau (CFPB). If the fees are going to increase, a lender is required to provide a revised loan estimate.
“It is illegal for a lender to intentionally underestimate charges for services on the Loan Estimate, and then surprise you with higher charges on a revised loan estimate or closing disclosure,” says the CFPB website.
At closing, origination fees can be found in Section A, page 2, of the Closing Disclosure.
Can you negotiate origination fees?
You don’t need to simply accept origination fees as-is. As a consumer, you can certainly shop around with different lenders and try to obtain less expensive fees. You can also attempt to negotiate closing fees with the lender you ultimately decided to work with.
But bear in mind that there are some fees that may be flexible or at the lender’s discretion and others that are not. Items like credit fees, appraisals, and others are less likely to be negotiable.
“Home buyers should take a close look at all fees and ask questions. You should not feel uncomfortable challenging or asking why these fees are there,” says Jack Kammer, vice president of mortgage lending for national mortgage originator OriginPoint.
However, as you shop around for the lowest fees possible, it’s important to understand that you’ll often be faced with a trade-off between either lower origination costs or a lower interest rate—it’s unlikely you’ll get both. What’s more, the lowest costs may not result in the best service.
“If a lender has very low fees, they may not be able to perform as quickly, especially if you have a short close date,” says Kammer. “Remember the adage ‘You get what you pay for.’ Purchasing a home is one of the biggest financial decisions of your life. Trusting this to the lowest bidder may not be the smartest move.”
Mortgage origination fees are costs added to a mortgage by lenders to cover their expenses. Some of these fees may be flexible or able to be negotiated. But others, such as credit check fees and appraisal fees, are charged by third parties and thus may not be negotiated. However, as a consumer, you can always shop around with different lenders to find the most competitive mortgage loan offer possible. These fees must be disclosed upfront as part of a loan estimate.