The fees which are levied to generate a loan and pool in the huge amount of money for the disbursement of the loan is known as an origination fee. Basically a loan is originated by banks or financial institutes which are designated as 'loan originators'. Such loans are initially just pools or huge sums of money in an account which are then 'sold off' or forwarded to different lender or brokers, who do the job of actually lending the loan. The origination fee is thus the charge levied by the originator of the loan.
Larger loans such as home loans, mortgage loans, which have giant principal figures usually have origination fees, as opposed to smaller loans. Home Equity Lines of Credit, home equity loans, construction loans and loans secured to real estate also tend to have such origination fees, that typically have high numbers.
These fees are typically charged to cover costs such as:
- Actual cost of origination of the loan.
- Underwriting costs which are incurred while approving, processing and handing over the loan to the broker-lender.
- Other compliance related costs which include, the compliance of Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD).
It must be noted that the Federal Housing Administration and Department of Housing and Urban Development maintain rules, regulations and guidelines which define the limits and nature of the closing costs. In fact, till January 2010, the origination fees could not exceed the threshold of 1% of the principal amount of the loan.
Facts and Applications
In the loan quotation that you receive after approval of your application or the HUD-1 Settlement Statement, the origination fees are mentioned in the form of percentages or points. '1 point' implies 1% of the loan principal amount which is disbursed to the lender. Similarly, 2 points is 2%, 3 points is 3%, and so on and so forth. In some cases though, a direct dollar amount is mentioned, though it is computed on the basis of percentage rate.
Thus an origination fee is basically a flat rate and it does not matter whether a loan is a big one or a small one. It's still levied. In some cases, though the origination fee can be avoided.
How to Avoid Loan Origination Fees
Avoiding a loan origination fee is a complete long shot. The usual process is that, once we the consumer-borrowers, file an application for the loan, the application gets processed by the lender who makes the credit check. Then the application is processed by the originator, where he underwrites the loan or rather decides the credibility of the entire loan and transaction. Then, if approved, a quotation is sent to the borrower who gives his consent, upon which the originator originates the loan, pools in the money and forwards it to the lender who disburses it. In some cases, the pooling in process is done beforehand. Now this entire process costs a lot and hence it often becomes quite difficult to get a loan without the origination fees. Here are some good options.
1. Loans without Closing Costs
There are some loans which are approved without closing costs. Now getting such a loan is quite difficult. For this you need to be an MIT graduate with a high paying corporate job, truth, point-blank. Apart from that, you also need to purchase a property which has a good intrinsic value with a fantastic projection of market value. The interest rate in such a case would also be substantially high as all the brokers would bear the closing costs initially, but then would recover the same through interest rates. Here you won't have to pay loan origination fees.
2. Long Term Loans
Some really loan term loans also have this option where the closing costs are initially borne by the broker following which they are charged into the interest rate, either as an additional fee or as a part of the interest itself. There are three things which you would need for such a loan, really, really good credit standing, next you would need a good property with good market standing and lastly an assured and regular income.
3. In the Lieu of...
In some cases, lenders charge other costs or fees in the lieu of origination fees in the guise of origination fees. In such circumstances, these fees can be reverted to their actual categories such as deposit verification, document preparation, etc. This can be done by negotiating with the broker or the lender.
4. Discount Points
Discount points work in the same way as that of the usual origination points. Discount points are basically pre-paid interests. By negotiating with the lender one can increase the discount points and bring down the total interest rate and the same time also take the advantage of almost zero origination fees. However, you will have to pay a lot, for the discount points. In theory, discount points are not an expense like the origination fees, that is it simply does not go worthless. You are basically paying interest beforehand.
5. Originators and Wholesale Lenders
The next trick which you can put to use is directly approaching wholesale or originating lenders. This way not only you avoid the excessive closing costs, but you can directly negotiate with the originating lender.
6. Bank Loans
The best and conventional way out. If you have a bank account in a major bank, a good credit score and regular income, then why not approach your own bank. This way you don't have to pay a hefty closing cost, nor would you have to pay any commissions. All you have to do is properly negotiate and vouch for a lowered or a no origination fee loan.
Again let me tell you, this is not a discouraging fact but on the contrary it's the reality. Getting a loan without any origination fee is a very, very long shot. You can of course negotiate for a really lowered rate of origination fee, it's quite easily possible and is often very successful.