Loan Origination Fee

Q: When do you pay a loan origination fee?

A loan origination fee can be paid in two different ways:n1. Added to the principal loan balance, which you’ll then pay off over time.n2. Automatically subtracted from the funds supplied to you at closing.

Q: Are loan origination fees negotiable?

It depends on the lender. Some hard money lenders may negotiate fees, but in most cases they’re set. To potentially secure a lower fee, consider a smaller loan amount or a longer loan term.

Q: Is the loan origination fee refundable if the loan doesn’t close?

Typically, loan origination fees are non-refundable. They cover the work involved in preparing your loan, whether or not the loan closes.

Q: Are loan origination fees tax deductible?

If the hard-money loan is part of a business venture (e.g., rental property or fix-and-flip), the fee may be deductible as a business expense. Consult your tax professional for guidance.

Q: What other fees are associated with loans?

In addition to a loan origination fee, you may encounter:n• Underwriting fee: Covers risk assessment, legal, and accounting costs.n• Document preparation fee: Pays for creation of legal and closing documents.n• Broker fee: Charged by third-party brokers (Source Capital is a direct lender and does not charge broker fees).

There are a number of fees associated with loans, one of which is known as a loan origination fee. This loan is charged for “originating”, or creating, the loan. The lender uses this fee to cover the upfront costs of preparing a new loan.

What Is a Loan Origination Fee?

A loan origination fee is a percentage of the total loan amount that lenders charge when processing a new loan application. It pays for the lender’s time spent preparing the loan, including:

Preparing loan documents
Running credit checks
Verifying income

Depending on how your lender structures your loan fees, your loan origination fee may be subtracted from your total loan amount, or it may simply be added to your principal loan balance to be paid off over time. .

How Does a Loan Origination Fee Relate to Hard Money Loans?

Loan origination fees are an essential part of the hard money loan process. In many cases, loan origination fees are higher with hard money loans than in traditional lending. This happens for a few reasons:

Increased risk: Hard money loans are inherently riskier transactions than traditional loans. Not only do they have much shorter terms, but they are secured by real estate, rather than financial responsibility.
Quicker timelines: Fees also increase due to the faster turnaround times of hard money loans.

At Source Capital, our loan origination fees start at just 2% of the total loan amount and vary based on your loan size, terms, and other factors.

How a Loan Origination Fee Works

When you apply for your hard money loan, your loan origination fee will be clearly stated on your loan estimate. Our expert lenders will take the time to ensure you understand the cost of this fee and all other fees associated with your loan.

How to Calculate a Loan Origination Fee

To calculate the cost of your loan origination fee, use this calculation:

Loan origination fee = Loan amount * Fee Percentage

For example, a 2% loan origination fee on a $200,000 loan is calculated as follows:

Loan origination fee = $200,000 x 0.02
In this example, the loan origination fee is $4,000.

Real‑World Scenarios

Let’s look at a few real world examples of loan origination fees in hard money lending.

High Value, Short Term Loan

A real estate investor is seeking a hard money loan to purchase a mixed-use commercial property for a fix-and-flip. The loan is for $4 million and has a term length of 12 months. Because of the high value and short terms of her loan, it’s considered a high-risk scenario. She’s charged a loan origination fee of 4%.

According to the above calculations, her loan origination fee is $160,000. Her lender adds this fee to her principal loan amount to be paid off over the course of her loan, making her new loan amount a total of $4,160,000.

Small, Upfront Loan Origination Fee

A homeowner is seeking a hard money loan to complete renovations on her property. She takes out a hard money loan for $300,000 using her home as collateral. The loan term is 24 months. Because she has a small loan with reasonably long terms, her loan origination fee is 2% to be paid upfront.

According to the above calculation, her loan origination fee is $6,000. When she is funded, her lender subtracts the $6,000 fee from her funds, so she’s issued $294,0000.

Loan Origination Fee FAQs

When do you pay a loan origination fee?

A loan origination fee can be paid in two different ways:

With the principal loan balance: Some hard money lenders may add your loan origination fee to your principal loan balance, which you’ll then pay off over time.
Automatically subtracted from your funds: Other hard money lenders may subtract the cost of your loan origination fee from the funds they supply you at closing.

Are loan origination fees negotiable?

It depends on the lender. Some hard money lenders may be willing to negotiate with you on loan origination fees, but in most cases their fees are set. If you’d like a lower loan origination fee, you may want to explore longer loan terms or a smaller loan amount.

Is the loan origination fee refundable if the loan doesn’t close?

Typically, loan origination fees are non-refundable. These fees cover the work involved with preparing your loan, which must be done whether or not the loan closes.

Are loan origination fees tax deductible?

If your hard- money loan is part of a business venture, like a rental property or fix-and-flip, your loan origination fee may be tax deductible as a business expense. We recommend talking to your tax professional to determine whether you can claim your loan origination fee on your taxes.

What other fees are associated with loans?

In addition to a loan origination fee, you may also be charged:

Underwriting fee: This covers the time spent evaluating the risk and cost of your loan, including legal and accounting fees.
Document preparation fee: This cost pays for the creation of legal and closing documents.
Broker fee: In some cases, loans may be arranged by third-party loan brokers who charge their own fees. Source Capital is an all-in-one direct lender, so we’ll never charge you broker fees.

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