A loan origination fee is the cost a lender charges a borrower for handling application paperwork and creating the unique specifications of a loan. For the most common consumer loans, this fee ranges from 1% to 6% of the total loan amount. To help you better understand one of the costs of borrowing money, we've broken down how loan origination fees work.
Loan Origination Fees Explained
When offering a loan, lenders charge borrowers loan origination fees in exchange for the service of processing a loan application and lending money. For mortgages, loan origination fees are tax-deductible and are included in the closing costs. For student loans, origination charges are subtracted from the total loan amount and paid off when the loan repayment period starts after graduation.
Origination fees are meant to offset the lender's costs associated with evaluating a loan application. For example, a bank considering a mortgage application must look at an applicant's credit score, debt history, current income, job stability and property value, among other factors. The bank must also decide the interest rate and loan terms that this unique applicant is qualified to receive, and then draft a loan proposal. In turn, a loan origination fee is billed to the borrower and paid off immediately when the loan agreement is signed, or over time through monthly installments.
Average Loan Origination Fees
Average loan origination fees range from 1% to 6% of the total loan amount depending on the type of loan borrowed. Mortgage applicants with good credit scores or who take out large loans will generally receive loan origination fees under 1%. For student loans, undergrad students with the highest financial need can qualify for origination fees of either 0% or 1%.
|Loan Type||Origination Fee|
|Auto Loan||0% - 2%|
|Mortgage||0.5% - 1%|
|Personal Loan||1% - 6%|
|Student Loan||0% - 4%|
|Small Business Loan||1% - 6%|
Some of the highest origination fees belong to unsecured personal loans, which aren't backed by collateral and carry more risk for lenders. These loans tend to be for smaller amounts and shorter terms than other types of loan, so the larger origination fees make up for the lower interest that lenders receive throughout the life of the loan. Similarly, auto purchases financed through dealers tend to include high origination and paperwork processing fees. Depending on the lender and state, auto loans borrowed from banks tend to have origination fees around 1%.
Origination Fees for Mortgages
Loan origination fees for mortgages typically range from 0.5% to 1% of the total loan amount, depending on the borrower's credit score and the loan's term length and size. For VA loans, origination fees cannot exceed 1% of the loan's total cost. The government requires that exact mortgage origination fees are disclosed by lenders in the Loan Estimate form, an official disclosure lenders provide to potential borrowers at the beginning of the application process.
It is important to note that lenders aren't allowed to increase the origination fee reported in the Loan Estimate except in special circumstances—for example, if the borrower changes their loan type from an adjustable-rate to a fixed rate, or decreases their down payment. In some cases, borrowers with excellent credit scores can negotiate for a lower origination fee than the one proposed on the Loan Estimate.
Mortgage Origination Fees
- Must be disclosed in the same dollar amount on the Loan Estimate and the Closing Disclosure
- Sometimes called "mortgage points" (1 point = 1% of the total loan amount)
- Can be tax deductible if the loan's use and payment meets the criteria of IRS Publication 530
Mortgage origination fees are also commonly referred to as "mortgage points." One mortgage point is a charge that equals 1% of the loan's total cost. In practice, this means that an origination fee worth half of a mortgage point, or .05% of the loan's total cost, would be added to the loan's total amount. If a mortgage lender provides lender credit, origination fees can be rolled into the loan amount and paid off in installments throughout the life of the loan. Otherwise, the fees are paid in a lump sum upfront.
For most mortgages, origination fees are tax deductible if the loan, borrower and home meet certain criteria outlined in IRS Publication 530, a government tax guideline form. You can usually deduct your origination fees all at once if they were paid upfront and your mortgage was used to buy or build your main home. However, you can deduct only the amount paid in any given year if your origination fees were charged as a lender credit.
Origination Fees for Student Loans
For federal student loans, origination fees are set by the government and vary by loan type. Origination fees of 0% are available only for Perkins Loans, which are provided to both undergraduate and graduate students with the highest financial need. Other loans provided directly to undergraduate students have origination fees of 1.069%. Loans provided by private lenders tend to have no origination fees but higher interest rates.
|Federal Loan Type||Origination Fee|
|Direct Subsidized (Undergrad)||1.069%|
|Direct Unsubsidized (Undergrad)||1.069%|
|Direct Parent PLUS Loan||4.276%|
|Direct Graduate PLUS Loan||4.276%|
|Perkins Loans||No fee|
Origination fees for student loans are deducted from the total amount borrowed and don't increase the balance that must be repaid. In other words, this means that a borrower won't receive the full amount requested in a loan, but also won't be charged extra for origination. For example, if a borrower requests a $10,000 Federal Subsidized Loan with a 1.069% origination fee, $106.90 will be deducted from the loan amount and $9,893.10 will be received by the borrower. Once the repayment period starts, the full $10,000 plus interest must be repaid.
Origination Fees for Auto Loans
Average origination fees for auto loans range from 0% to more than 2% of the total loan amount, depending on your state, loan terms and lender. Banks typically charge auto loan borrowers up to 1% of their loan's amount in origination fees. However, dealers often charge separate fees called processing or documentation fees, which are meant to compensate dealers for their service of crafting a purchase agreement. These fees are charged as either a percentage of the total amount or in a fixed charge amount.
Government regulations on documentation and processing fees vary by state. For example, California allows a maximum of $80, while Florida has no regulations regarding the maximum allowed documentation fee. It's important to check the terms of your purchase agreement for exceptionally high dealer fees that are unrelated to a loan, especially in states with no regulation on documentation fees. You can find your state's specific regulations on their DMV website.
Origination Fees For Small Business Loans
Origination fees for small business loans usually range from 1% to 6%. These charges, which are assessed at closing, vary depending on the lender and the purpose of the loan. Some small business lenders charge multiple origination and service fees, while others minimize opening fees in exchange for higher interest rates and stricter repayment terms. For example, OnDeck charges only one origination fee — a 2.5% to 4% service fee — and requires daily or weekly loan payments.
For government-backed SBA loans, a guarantee fee may be charged for the government's insurance. Private lenders who fund SBA loans can also add a reasonable "packaging fee" at closing. If you're looking to minimize the costs on a small business loan, it's important to remember that other factors like interest rate and late payment penalties may have more of a long-term financial effect than the origination fee.