Understanding loan origination fees

[Siouxzie Hanes]

Are origination fees different across the board and is there a cap?

My estimate was 4.8% rate conventional bank statement loan was high but was okay with it. Now it's coming back as 7.2% when they sent the paperwork and it also shows 2% points, $13,000 origination fee and $2k misc cost for a total of $16,050 in loan fees. Does this seem normal? 

Thank you. 

[Aaron Byrne]

Origination fees are certainly different when compared between lenders. Essentially, that is the fee which compensates the lender for making the loan. This fee may be higher or lower for a number of reasons, one of which includes if there are any "junk fees" charged by the lender like an inflated processing or underwriting fees.

As to a cap, it depends on the type of loan. For example, qualified mortgages have a 3% cap on fees charged by the lender for loan amounts under 100,000.

From what I have been hearing/seeing, conventional rates have ballooned and thus a 4.8% rate on a bank statement loan sounds attractive. I assume that rate was not locked which is why the bank came back with a higher rate of 7.2% which strikes me as being a bit high, but without knowing more details, it is difficult to form any educated opinions in regards to the rate/fees being high/low.

At the end of the day however, you are not locked into any specific financing until loan consummation, so do not hesitate to explore other options. Should you discover this offer is competitive, you can always circle back at that time, but be conscious of any rate locks or potential adjustments that may occur if you delay on moving forward while shopping other lenders.

[Siouxzie Hanes]

Thank you so much for being detailed and taking the time to respond. Very helpful!

[Chris Mason]

Quote from @Siouxzie Hanes:

Are origination fees different across the board and is there a cap?

My estimate was 4.8% rate conventional bank statement loan was high but was okay with it. Now it's coming back as 7.2% when they sent the paperwork and it also shows 2% points, $13,000 origination fee and $2k misc cost for a total of $16,050 in loan fees. Does this seem normal? 

Thank you. 

 As "the market" gets more and more sure we're about to have a recession, you will see the higher risk "alternative documentation" loan types have their pricing reflect.

You can swap fees for rate, rate for fees. The fees are the minute hand, the rate is the hour hand. 2 hours and 60 minutes, and 3 hours, on the back end, are identical. Though one might read as a lower rate and more points, while the other reads like a higher rate with fewer/no points. 

[Erik Estrada]

Quote from @Siouxzie Hanes:

Are origination fees different across the board and is there a cap?

My estimate was 4.8% rate conventional bank statement loan was high but was okay with it. Now it's coming back as 7.2% when they sent the paperwork and it also shows 2% points, $13,000 origination fee and $2k misc cost for a total of $16,050 in loan fees. Does this seem normal? 

Thank you. 

They can be borrower paid or lender paid depending on the lender. If it is lender paid, the rate will increase. Also for business purpose loans (DSCR) some brokers quote a higher rate so they can earn more on the back end of the loan (Yield Spread Premium). They also can do this to protect their client if the rate is not locked. If the loan is small, they may charge some $500 processing fee (sometimes a loan of $100k takes the same amount of work as a $1 million dollar loan). 

Any lender you work with should be transparent with what they charge. It is illegal for them not to (If they are licensed). You will encounter some in this space that are not licensed and you should be careful. 

[Jonathan Taylor]

@Siouxzie Hanes one thing to note is closing costs, prepays, escrows and origination fees need to be line itemed out. Buyers tend to get sticker shock since they think these are the same. Every conventional loan Ive closed is about 1/3rd prepays (prepay property tax, which in  CA can be hefty for high balance loans) along with insurance. These arent loan costs are you are front loading the impound account to cover the next bills. Loan origination to pay for a broker is usually covered by the lender so it isnt a line item that is charged to the borrower. Then you have title and escrow/appraisal/title insurance which is usually charged to the buyer. Average actual closing costs (not prepays) are 2-3%. 

The 2% origination fee is high and should be negociated to 1.5% since that is market rate. If this broker is charging Lender paid as @Erik Estrada mentioned then another way to get it lower. 

If you could provide loan amount and which % of the costs is prepays, we can help you better understand the charges.

[Stephanie P.]

Quote from @Erik Estrada:

Quote from @Siouxzie Hanes:

Are origination fees different across the board and is there a cap?

My estimate was 4.8% rate conventional bank statement loan was high but was okay with it. Now it's coming back as 7.2% when they sent the paperwork and it also shows 2% points, $13,000 origination fee and $2k misc cost for a total of $16,050 in loan fees. Does this seem normal? 

Thank you. 

They can be borrower paid or lender paid depending on the lender. If it is lender paid, the rate will increase. Also for business purpose loans (DSCR) some brokers quote a higher rate so they can earn more on the back end of the loan (Yield Spread Premium). They also can do this to protect their client if the rate is not locked. If the loan is small, they may charge some $500 processing fee (sometimes a loan of $100k takes the same amount of work as a $1 million dollar loan). 

Any lender you work with should be transparent with what they charge. It is illegal for them not to (If they are licensed). You will encounter some in this space that are not licensed and you should be careful. 

Licensed or not, @Siouxzie Hanes, you should get the pricing and fees (they are separate) in writing.  Being careful doesn't just apply to the great "unlicensed".  Plenty of licensed loan originators, brokers and lenders didn't honor pricing they had promised to their borrowers in the last couple of months; same with unlicensed.  Unfortunately, when the market moves hard like it just did, no one is safe.

Stephanie

[Alex Hunt]

You got what is called "bait and switched". Some will argue this isn't true, but if you had a 4.50% there is no way after these increases in the market and the FED the trade in the rate would not be this high, 7.2% with $16,050 in loan fees... We have caps on fee amount of 4.00% total, but I am not sure if a cap is enforced across the industry. I am not sure how far you are along this process or if it is possible but I would advise not closing that and finding a new lender. Unless this is 5 units or more I know for a fact I could do this much cheaper

[Stephanie P.]

@Alex Hunt

It's not right for you to say this lady got "bait and switched". You don't know her particular situation. Her score could have dropped and her ltv could have gone up. Just yesterday, I quoted a rate on a 4 unit in Alabama for a borrower who has about a 780 score. The rate, at 80% ltv was 7.5 with one lender and 6.875 at 70%. Same borrower, same score, same ltv, similar property closed in January for 4.25%. These are DSCR loans. The OP is talking about a bank statement loan and they've gone through the roof as well.

On bank statement loans, most brokers have their lender paid comp set at 2 points or more, so that wouldn't be considered high, even if it's borrower paid comp. 2K in miscellaneous fees isn't out of the norm either. Lenders charge from $999 to $1995 for underwriting fees and then another $595 for an LLC review and maybe $600 in closing fees. There can be miscellaneous other doc fees as well. My point is there are lots of different scenarios that could drive her rate higher.