What Is a Loan Origination Fee?

A loan origination fee is a one-time, upfront fee lenders charge for making a loan. It’s part of the cost of borrowing money and can help lenders offer more financing to buyers. Here’s how loan origination fees work, what they cover, and some strategies to negotiate or lower them.

What is a loan origination fee?

When you buy or refinance a home through a lender, you’ll typically have to pay certain upfront mortgage closing costs. One of these costs is the loan origination fee. It’s part of the cost of obtaining financing.

“Origination fees refer to the cost that a lender needs to cover for administrative expenses when processing a mortgage application,” says Alexei Morgado, REALTOR® and CEO of Lexawise. “It covers underwriting, document preparation, and everything else required to underwrite and fund a loan.”

When you receive conditional or final approval for a loan, your lender will send you a loan estimate. This document will include any upfront costs, including the origination fee. You’ll also find this information in your final closing disclosure.

How much is the typical loan origination fee?

Home loan origination fees for new mortgages usually range from 0.5% to 1% of the total loan amount. If you’re refinancing an existing mortgage, this fee may cost up to 1.5% of the loan principal.

However, the typical origination fee amount depends on the loan type and the lender. For example:

• FHA loans: FHA loans used to have a maximum origination fee of 1% of the mortgage amount. Now, the FHA only limits origination fees for certain programs, such as the Home Equity Conversion Mortgage (1% maximum) and 203(k) Rehabilitation Mortgage (2% maximum).
• USDA loans: Origination fees must be “reasonable,” as determined by the USDA. They can be as low as 1% of the loan amount.
• VA loans: VA loans have a maximum origination fee of 1% of the loan amount.
• Conventional loans: The typical loan origination fee is 0.5% to 1%.

What does the loan origination fee cover?

Loan origination fees are part of your mortgage closing costs. They can cover quite a few different upfront costs related to processing and approving your loan. These can include:

• Processing the application
• Verifying financial information
• Preparing documents

“Basically, they cover all the behind-the-scenes effort that goes into getting your mortgage from application to close,” Morgado says. 

Some mortgage lenders will itemize origination fees on the loan estimate. For example, you might see the application fee and underwriting fee listed as separate charges under “Origination Charges.” If you paid any mortgage points, you’ll also find those in this section.

Can you negotiate or avoid loan origination fees?

Third-party costs are out of the lender’s control (such as the fees for a credit check or a home appraisal), but you can negotiate fees that are set by the lender.

“Borrowers can and should try to negotiate origination fees,” says Steven Parangi, a real estate attorney, licensed mortgage loan originator, and owner of Alpine Mortgage. “The most powerful tool is comparison. Get quotes from multiple lenders. When you have competitive offers in hand you can show a lender you are seriously considering other options and ask them to match or beat the terms, including the origination fees.”

According to Parangi, it’s best to ask about any fees early on. That way, you’ll know what to expect before going forward or getting locked into a loan. You can also work with a mortgage broker who can help you find the best deals.

“Don’t be afraid to ask your lender to explain their fees. Sometimes a line item that can be removed or reduced is easy to find,” Parangi says. “Once you have identified a lender you want to work with, ask them to put any fee reductions in writing before you move forward.”

For example, you might be able to get a no-closing-cost mortgage. This means no upfront origination fee, but you might end up with a higher interest rate instead and pay more in interest charges. Or the lender might add the closing costs to your total loan amount, resulting in higher monthly payments and less home equity.

How do loan origination fees fit into closing costs?

When you apply for a mortgage or mortgage refinancing, you’ll have to pay certain fees. This can include monthly costs like:

• Principal and interest
• Mortgage insurance (if you put down less than 20%)
• Homeowners insurance
• Property taxes

It can also include one-time or upfront fees to cover:

• Origination 
• Application 
• Processing 
• Administrative expenses
• Underwriting 
• Discount points (if applicable)
• Government fees and taxes
• Upfront escrow charges (like the first year of homeowners insurance and prepaid property taxes)

Loan origination fees are a percentage of your loan amount, so they can add quite a bit — potentially thousands of dollars — to your upfront costs. However, you should consider the total cost of the loan beyond just the origination fee.

“You need to pay attention to the total closing cost, as some [lenders] may charge a minimal origination and much higher ancillary charges,” Morgado says. “You would have to request an itemization of all the charges that each lender will charge and compare those across the board. Also, review what services the origination fee entails, since services may vary between lenders.”

Sometimes, you’ll find that a lender that charges a higher origination fee is worth the cost.

“For example, a more experienced lender may charge a slightly higher origination fee but have the expertise to find better loan programs or handle complex situations that will save you money over the life of the loan,” Parangi says.