Understanding Real Estate Loan Origination Fees

Doesn’t it feel like every part of your real estate investment comes with a fee? Fees to the lenders, fees to the real estate agents, fees to the contractors.

Since those fees are a part of doing business, it’s essential to understand where they come from. In particular, origination fees are one-time fees that cover the administrative costs associated with underwriting any kind of real estate loan.

Here’s what you need to know about how origination fees work and how much you should expect to pay when borrowing money for your next real estate investment.

What is an origination fee?

An origination fee is a portion of your loan amount that lenders charge to cover the administrative costs associated with your loan application. Sometimes lenders figure your fee as a percentage of your loan, while others set a fixed rate regardless of your loan amount.

Depending on the lender and the type of loan, paying this fee covers credit checks, document review, income and asset verification, and the general administrative fees associated with processing your loan application.

How much can you expect to pay in percentage-based fees?

If your lender chooses a percentage-based fee, the origination fee for a real estate loan generally ranges between 0.5% and 1% of the loan total but can be higher depending on the lender and loan type.

Here’s an example of how to calculate your loan’s origination fee:

Start with your original loan amount

Depending on the type of loan and the lender you choose, there may be several fees and additional closing costs. The origination fee is calculated from the amount of money you'll receive from the lender before any other fees are considered.

Origination fee percentage

Discuss your origination fee percentage with your lender. Because it varies by loan amount and type, and experience level, this may differ from a previous origination fee.

Calculate your origination fee amount

To calculate the origination fee amount, multiply the loan amount by the origination fee percentage in decimal form:

Origination fee amount = Loan amount × (origination fee percentage /100)

So if your real estate loan is $200,000 and the origination fee is 1.5%, the following equation will help you determine how much your origination fee will cost:

Origination fee amount = $200,000 × (1.5 / 100) = $3,000

The origination fee is typically deducted from the loan proceeds before your lender disburses the loan, so it’s important to know what your origination fee will be before you receive the loan in order to budget accordingly.

When comparing loan offers from different lenders, it’s important to consider both the interest rate and the origination fee to know exactly how much your loan will cost.

Advantages and possible pitfalls of percentage-based origination fees

For more complex or larger loans, percentage-based origination fees reflect the increased paperwork and resources your lender will use to process your loan.

Lenders may be more motivated to manage costs to ensure that the origination fee remains competitive and appropriate for the loan size.

While percentage-based fees are proportional, they result in higher dollar amounts for larger loans.

When comparing loan offers from different lenders, you'll need to factor in both the interest rate and the percentage-based origination fee to know how much you’ll have to pay.

Often, the final origination fee isn't calculated until the loan amount is determined, making it more unpredictable and challenging to budget for upfront costs adequately.

Here’s the rub: as property values and loan amounts increase, borrowers face higher origination fees. Some borrowers also find it more challenging to negotiate percentage-based fees compared to fixed fees, especially if lenders are less flexible about adjusting the fee structure.

Fixed vs. percentage-based origination fees: which one is right for you?

Some lenders also offer a fixed origination fee. These fees are a pre-set amount your lender will charge you for the loan, regardless of how much you borrow.

Like interest rates, each type of origination fee schedule has benefits and potential disadvantages depending on your financial picture and funding needs. And, like other fees, there are a few advantages and potential drawbacks of choosing a real estate loan with a fixed origination fee.

A loan with a fixed origination fee can make it easier to shop around and compare different loans since you know exactly how much the origination fee will cost upfront.

If you’re asking for a larger loan, the fixed fee accounts for a smaller overall percentage of your total loan amount, and you may pay less than you would with a percentage-based fee.

However, with a smaller loan, a fixed fee might be disproportionately high depending on the amount of the origination fee and the terms of your loan.

What you need to know about “no-origination fee” loans

Some lenders may also offer a "no-origination fee," also known as 0 points, real estate loans that don’t charge an upfront origination fee for processing and underwriting the loan.

These types of loans can be advantageous because they reduce the initial upfront costs associated with the loan and allow borrowers to consider the full loan amount for budgeting.

That said, there may be “hidden” costs in terms of higher interest rates and principal payments depending on the terms and amount of the loan.

An experienced real estate lender can help you navigate the various types of loans and associated fees to choose the best financing for your needs.

Experienced real estate investors with a strong business plan and track record of success in developing properties for BRRRR or fix and flip transactions often have more room to negotiate better rates and terms on a new real estate loan.