Mortgage loan origination is the process of arranging a home loan by a direct lender or a third party mortgage broker. The loan originator prepares and submits your loan application and documentation to the lender for underwriting. Here are several tips before you refi to help you avoid common mortgage mistakes when it comes to loan origination.
Loan Origination Definition
Loan origination is simply defined as the process of creating a home mortgage loan.
Loan originators are salespeople working for a commission on your home loan. Your loan origination salesperson could be a mortgage broker or a loan officer at the bank. The mortgage broker gets paid by charging you an origination fee or with lender paid compensation in exchange for charging you a higher interest rate.
Speaking of fees, some loan originators use third party processors to prepare paperwork, a cost they pass on to you in processing fees. Some mortgage brokers are too busy selling home loans to be bothered with doing their own paperwork. Should you trust a mortgage broker that charges you third party processor fees?
If you find a loan processing fee on your Good Faith Estimate question why the fee is there in the first place and why the broker is too busy to process their own paperwork before moving on to the next broker.
Remember your mortgage broker is a salesperson; their job is to persuade you to sign for a mortgage with their company, regardless of whether or not you’re buying a new home or mortgage refinancing. The broker’s priority is to close the loan, not necessarily get you the best deal on your refi.
Loan Origination Fee
The fee you pay the broker or bank for arranging your home loan is called the loan origination fee. This fee is often called origination points, which is a percentage of your home loan. One origination point is one percent of your mortgage amount. Don’t confuse origination points with discount points. Discount points are a fee you pay to buy down your interest rate a closing, separate from the origination fee.
How much is reasonable to pay for loan origination? One percent is standard; however, many community-based credit unions charge as little as $400 for loan origination fees.
Your loan origination fee is the mortgage broker’s commission for arranging your home loan and is commonly overpaid by many homeowners. The more you pay for this fee and other closing costs the less benefit you’re getting from today’s historically low mortgage rates. Some brokers misrepresent this fee by telling borrowers that it’s used to pay the processing and application fees.
Mortgage loan origination fees are fully negotiable.
What about no fee mortgage loans? It’s true that there are no fee refinance offers out there. These are not truly “no fee” mortgage loans as the fees are just being paid by the lender in exchange for giving you higher mortgage rates. The markup of your interest rate to cover the broker’s fee and other closing costs is called Yield Spread Premium.
If your loan has a loan origination fee or Yield Spread Premium you’ll find it disclosed on your HUD-1 settlement statement or Good Faith Estimate. As far as loan documents go, think of your Good Faith Estimate as a sales brochure, where the HUD-1 is the final word when it comes to the terms and fees on your home mortgage.
Shop Around For The Lowest Rates AND Fees
Many homeowners make the mistake of focusing only on getting the lowest mortgage rates at the expense of fees. Many of the fees you pay closing on your home loan are negotiable and vary from one lender to the next. Invest a few hours of your time comparison shopping the loan origination fee, discount points and mortgage rates and you can literally save yourself thousands of dollars.
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