Legal Definitions - origination fee

An origination fee is a charge imposed by a lender to cover the administrative costs associated with processing a loan application and establishing the loan. It is typically an upfront payment made by the borrower to the lender for the work involved in evaluating the application, underwriting the loan, and preparing the necessary documentation. This fee is often calculated as a percentage of the total loan amount and can vary depending on the type of loan and the lender.

Here are some examples to illustrate how an origination fee works:

• Small Business Loan: Imagine a small business owner, Alex, applies for a $75,000 loan to expand his bakery. The bank approves the loan but charges a 1.5% origination fee. Alex will pay $1,125 (1.5% of $75,000) to the bank. This payment covers the bank's efforts in reviewing his business plan, assessing his credit history, and setting up the loan agreement for the expansion.

• Personal Loan for a Major Purchase: Maria decides to take out a $20,000 personal loan from an online lender to purchase a new recreational vehicle. The lender's terms include a $300 origination fee. Before Maria receives the full $20,000, the lender either deducts this $300 from the loan principal or charges it separately. This fee compensates the lender for the administrative work involved in processing her application, verifying her income, and preparing the loan documents for her RV purchase.

• Mortgage Refinance: John wants to refinance his existing home mortgage to take advantage of lower interest rates. The new mortgage lender he chooses includes an origination fee as part of the closing costs. This fee covers the lender's expenses for processing John's new mortgage application, conducting the necessary financial assessments, and preparing all the legal paperwork required to replace his old mortgage with the new one. It is a cost for the service of setting up the new loan agreement.