What Are Loan Origination Fees?

What is Loan Origination?

In real estate, many projects are funded with a mix of debt and equity. In order to secure the debt funding, developers go through a multi-step process called loan origination. This process begins with the developer submitting financial information to the bank or lender for the purchase or refinance of the project and ends when the funds are distributed.

What is a Loan Origination Fee?

Loan Origination fees are the fees charged by lenders in order to be compensated upfront for processing new loan applications. These fees are used by the lender to make more money and turn a higher profit per loan and are charged based on a percentage of the loan amount, typically ranging between 0.5%-1%.

Loan Origination fees are part of the closing costs in a deal and are paid upfront. It is important to accurately account for them as they can be a large expense. It is beneficial to negotiate with lenders and shop around to get the best deal as interest rates can vary depending on credit ratings.

These fees are more beneficial to the lenders as they are meant to offset the lenders costs associated with evaluating a loan application. They sometimes also consist of the majority of income from the loans as these loans are often packaged and sold to mortgage investors who then make them available on the bond market, shortly after closing.

We are going to demonstrate how the loan origination fee is incorporated by using the Condo Development template from Top Shelf Models.

In this example, we enter 1.5% for the origination fee in cell J28, which is blue because it is an input cell. From there, the model calculates the origination fee in cell K28 by multiplying the origination fee percentage by the LTC loan amount in cell K17. The origination fee then flows to the levered cashflow portion of the monthly and annual cashflows tab.

Loan Origination Fee vs. Real Estate Commissions

Real estate commissions and loan origination fees are both part of the closing costs. However, they are different in that real estate commissions are fees paid to the seller’s agent and the buyer’s agent for real estate transactions. This expense is typically paid for by the seller of the property and vary depending on the type of property.

Loan Origination Fees on the other hand are fees associated with taking out a loan and are paid upfront.

Conclusion

Loan Origination Fees are intended to cover a range of miscellaneous lender costs including the processing of the loan application, the cost of underwriting the loan, and preparing mortgage documentation. These costs add up and can be a large expense and hence need to be accounted for accurately.

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About the Author

Eric Bergin is the founder of TSM. He realized that there was a need for real estate financial models that were more than just generic templates. He wanted to create a personalized product for his customers that would ensure success for them and their company. Please reach out to him if you have any questions on loan origination fees or if he can help you with your modeling needs.