If there's one constant with home buying, it’s that no two mortgages are the same. When looking for a home mortgage, borrowers are looking for interest rates and terms suitable for their needs. Borrowers will compare and contrast interest rates across different banks and lenders to get the best deal. Exceptionally savvy borrowers will go further and compare origination charges levied by the lender.
While shopping around for the best mortgage, borrowers may feel like they have to have a dictionary in tow to decipher all of the terms thrown at them. Origination fees vs. origination charges can be one of the most confusing parts of a loan offer. Diving into the difference between the terms, what they mean, and why there is no uniformity in the industry can help borrowers understand the lending process better and find the best mortgage.
What is an origination fee?
A lender charges an origination fee in exchange for originating a loan. The fee covers the expenses that lenders incur to originate the loan. These expenses include paperwork, the information validation process, and credit checks.
The origination fee can include application processing, underwriting and loan funding, and other administrative services. Each lender determines its origination fee, and there is no standardization. The fees can differ by lender and by state.
The origination fee is a charge that some lenders may be willing to negotiate, especially if refusing to budge on the fees means the lender will lose business. Many potential borrowers may not be aware of their ability to negotiate fees.
Are origination charges and origination fees the same?
In a word, no. Origination charges are charges made upfront, representing a collection of fees. The umbrella terms of "origination charges" include the origination fee and other fees, such as the application fee, underwriting fee, processing fee, verification fee, and rate-lock fee.
The origination fee is a single fee for a single service, while origination charges incorporate multiple fees. Some lenders will show the origination fee as a separate line item, and some will not.
For example, Lender A can decide to charge $1,195, Lender B can decide to charge two fees — underwriting and origination totaling $1195, while Lender C can choose to charge only the line item underwriting fee for $1,195. All three are the same, but the lack of uniformity among lenders can lead to understandable confusion for the borrower.
What matters when comparing lenders
Lenders can choose to itemize the origination fee or not, and they can differ wildly in how they itemize it. This lack of uniformity makes it difficult for borrowers to compare apples-to-apples between lenders.
"Depending on the lender, origination charges may be more or less itemized," the Consumer Financial Protection Bureau states. At the end of the day, it's the total that matters.
Depending on the lender, the itemized fees may be listed in different areas of the Loan Estimate document, making things more complicated. What borrowers will want to do is take the advice of the CFPB and find what matters: the total.
What does regulatory guidance say?
Lenders have quite a bit of freedom in noting or itemizing fees, per regulatory guidance. Creditors giving good faith estimates do not have to provide itemization, making comparison difficult. The inconsistency between lenders can make mortgage shopping a frustrating process.
Annual percentage rate has been used for decades to compare and contrast mortgages. Few potential borrowers will include the cost of loan origination in their comparisons, but it can wildly change the cost of getting a mortgage. While APR was invented to make it easier to compare loan rates across lenders, borrowers are left confused and seeking guidance with a lack of regulation on verifying if lenders are consistently calculating APR.
The mortgage industry has somewhat missed the boat in terms of being able to best service potential borrowers. With the unregulated APR calculations and lack of uniformity in fees, the entire process is needlessly confusing.
While there have been federal acts brought forward (for example, the Dodd-Frank Wall Street reform bill) to protect consumers and allow them to better shop for mortgages, the process remains complicated and challenging. While regulation language states that fees charged should be bona fide and reasonable, they still vary wildly.
Greater clarity is needed
The utmost clarity is needed for borrowers to assess their different lending options fairly. It is high time that home lending is democratized and regulators crack down on unfair and unscrupulous practices.
Borrowers also need to educate themselves on the different terms, and wildly different ways lenders itemize fees.
Giving borrowers a way to shop around, compare and contrast lenders will allow them to find the best lender for their needs.
