Shopping Around for Lower Home Loan Fees

Part 1: Origination Charges

By JSL

While we are in the business of buying homes from sellers who want to sell quickly to a cash buyer, we not infrequently deal with sellers who are simultaneously looking to sell one home to us and buy a home in another location.  The topic of home loans and their related fees comes up in our discussions with these sellers, so we wanted to put some content out there that could be helpful. 

You don’t usually hear it phrased this way, but I like to think about getting a home loan (also referred to as a mortgage) as, “buying a mortgage,” just like you would think about buying a car, a computer or any other product or service you decide to buy or hire someone to provide to you.  While the mortgage broker or lender you work with won’t call it, “the price,” of the mortgage and will instead use terms like, “origination fees,” “underwriting fees,” “points,” “basis points,” and other terminology which makes it a bit more confusing, at the end of the day the total of all the upfront costs is just the price you pay in exchange for receiving the loan. 

Don’t fall into the trap of thinking this is such a specialized service and/or so complicated that you need to accept the “standard” fees charged by the first lender or mortgage broker who speaks with you.  As long as you can qualify for a home loan (more on that in a different article), this is a product that you can shop around for just like anything else! 

This series of articles will hopefully improve your understanding of those items that are built into the total upfront “price” of a home loan, and thus enable you to be a better mortgage shopper.  I emphasize upfront price because this series of articles does not discuss the long-term costs of your loan, such as the interest rate you will pay for the years you keep the home before refinancing or selling, mortgage insurance, and other long-term costs.  These items are of the utmost importance in determining the total cost of your mortgage for the life of your loan and will be discussed in a separate series. 

Origination Charges

Origination Charges are one of the big-ticket upfront costs that you should definitely comparison-shop.  Appearing at the top of the second page of your “Loan Estimate” (a universally used document amongst lenders/mortgage brokers which you will receive during your application process), you will see an item labeled, “A. Origination Charges.”  Across from that item you will see a total price for the Origination Charges.  Underneath the total you will see a list of items making up the total Origination Charges and their individual cost, such as: the Loan Commitment Fee, the Origination Fee, the Processing Fees, Underwriting Fee, Tax Transcript Fee, MERS Registration Fee, Courier Fee, Rate-Lock Fee, Verification Fees and potentially a few others. 

Here is an example from a lender we recently considered working with:

Note that for this same property, we received a different loan estimate with Origination Charges totaling $1,250.00, a 30% savings over the estimate pictured above.  We also received an estimate that was going to charge $2,000.00 in total Origination Charges. 

Don’t Be Fooled by the Labels

As you can see in the example shown above, the lender listed an Origination Fee and a Processing Fee and an Underwriting Fee.  In a not so coincidental coincidence, they all just happen to be the same $450.00 cost.  If you ask your lender what the difference is, you will get a sense that these are really covering the same sorts of things (reviewing your application, your financial documents, preparing and processing paperwork, etc.). 

The additional line items can be boiled down to not-so-creative marketing.  With additional labels and line items it sounds like more work, makes each individual charge feel more reasonable and may be more palatable for the customer.  This reduces the likelihood that customers will push back on these fees (but you should!).  The point here is that you should not get sucked into the different labels placed on these items as much as you should focus on the total Origination Charges at the top of Section A. when comparing pricing between lenders. 

Don’t Be Fooled by “No Origination Fee” Loans

Some lenders advertise as offering loans with no origination fee.  On the more dishonest end of the marketing spectrum, the origination fee will just show up under a different name (like the, “processing fee,” in the example above).  On the more honest end of the spectrum, it will be true that you are not paying an origination fee, but instead of that upfront fee you will be asked to pay a higher interest rate for the life of the loan.  Depending on how long you hold onto the loan at that higher interest rate, you may be spending far more over the life of your loan than if you had paid an upfront origination fee.   

Ask that Origination Fees be Removed

Your lender will be making money from the interest rate they charge.  A large percentage of lenders quickly sell the loan they make to you after the loan closes, and they will be making money from that sale.  The Origination Charges are just one more avenue where they make a profit.  The more you shop around, particularly when the market for making loans is not as strong (like at the time of this writing), you will find lenders who are willing to shave off some or all their Origination Charges to get the deal done. 

Always Ask the Seller for Credit

Selling a home has become much more difficult in today’s market.  With home values declining, properties sitting on the market for longer, and buyers being picky, sellers who want to sell quickly will be open to providing buyers with concessions.  Accordingly, you should absolutely ask sellers for credit toward your closing costs.  That credit can be applied against your loan origination charges (amongst other expenses) to reduce your upfront costs in buying a home. 

Hopefully the above information has at least partially added some clarity when it comes to one of the upfront costs of “buying a mortgage.”  In the next article in this series, I will discuss the next line items in the Loan Estimate, “B. Services You Cannot Shop For” and “C. Services You Can Shop For.” 

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Josh Lebovits has been a real estate investor since 2011, and owns/operates single-family, multifamily, and commercial real estate in multiple markets in Northeast Ohio with his wife and partner, Elina.  When they are not onsite managing construction projects, getting their hands dirty fixing things, and touring neighborhoods and properties, Josh and Elina can be found walking in the Metroparks, enjoying ice cream at Mitchell’s, pretending to work out at LifeTime Fitness and traveling.