An origination fee is the upfront fee a lender charges for underwriting, structuring and closing a loan, stated as points (a percentage of the loan amount) or in basis points and paid at closing, usually netted from the loan proceeds. It is separate from third-party closing costs and from fees charged later in the life of the loan.
How is an origination fee quoted and calculated?
Origination fee = loan amount multiplied by the fee percentage.
The fee is quoted in points or in basis points. One point is one percent of the loan amount, and one basis point is one hundredth of a percent, so a quote in either unit converts to a dollar amount as soon as the loan amount is set.
Illustrative example:
| Item | Amount |
|---|---|
| Loan amount | $20,000,000 |
| Origination fee quoted | 1.00% (100 basis points) |
| Origination fee in dollars | $200,000 |
| Net proceeds funded at closing | $19,800,000 |
The borrower signs a note for the full loan amount and receives the loan amount less the fee. Interest accrues on the full amount, not on the net proceeds.
What does the origination fee cover?
The fee compensates the lender for the work of making the loan: underwriting the property and the sponsor, obtaining credit approval, structuring the terms, and closing.
The origination fee does not cover third-party costs. Appraisal, environmental and engineering reports, lender’s legal fees, title insurance, survey and recording charges are billed to the borrower on top of the fee, and a lender commonly collects a deposit against them at application.
How does it differ from exit fees, extension fees and rate-lock deposits?
Each fee attaches to a different event in the life of the loan.
| Fee | When it is paid | What triggers it |
|---|---|---|
| Origination fee | At closing | Making the loan |
| Exit fee | At repayment | Payoff of the loan at or before maturity, common on bridge and debt fund loans |
| Extension fee | On exercise of an extension option | Each extension of the maturity date the loan documents permit |
| Rate-lock deposit | At rate lock, before closing | Locking the interest rate ahead of closing; applied at closing or forfeited if the borrower fails to close |
An exit fee is the mirror of an origination fee: the same kind of charge, collected when the loan ends. A bridge loan commonly carries both. An extension fee is paid only if the borrower exercises the option, and is conditioned on the extension tests in the loan documents. A rate-lock deposit is a good-faith deposit rather than a fee: it is returned or credited if the loan closes.
How does the origination fee affect the effective cost of the loan?
The fee raises the loan’s effective interest rate above its note rate, because the borrower pays interest on the full principal while receiving less than the full principal. The effect depends on how long the loan is outstanding. Spread over a long term, a fee adds a small amount to the annual cost; spread over a short bridge loan that is repaid early, the same fee is a large share of the annual cost.
For that reason a borrower comparing loan quotes compares the all-in cost and not the note rate alone: origination fee, exit fee, extension fees, third-party costs and any prepayment charge, all measured against the expected hold period.
For accounting purposes the fee is a deferred financing cost, capitalized at closing and amortized over the term of the loan as an addition to interest expense.
Where does the origination fee appear in the loan documents?
The fee is first stated in the term sheet or application and then in the commitment letter. At closing it appears in the loan agreement’s fee provisions or in a separate fee letter, and on the closing statement as a deduction from the proceeds funded. The promissory note states the full principal amount, not the net proceeds.
The loan agreement also states the fees that come later: the exit fee, the extension fee and its conditions, and any fees for consents, modifications or partial releases. A borrower tracking a portfolio records each fee, its trigger and its amount beside the loan’s maturity date and extension deadlines, because the fees due at extension and at payoff are part of the cost of each decision.
Frequently Asked Questions
Is an origination fee paid in cash at closing?
Usually it is netted from the loan proceeds, so the borrower receives the loan amount less the fee rather than writing a separate check.
Does interest accrue on the origination fee?
Interest accrues on the full principal stated in the note, which includes the amount withheld to pay the fee. The fee itself does not bear interest.
Is an origination fee negotiable?
Yes. The fee is a term of the loan like the rate and the spread, and lenders trade fee for rate.
What is the difference between an origination fee and points?
Nothing. Points are the unit the fee is quoted in: one point equals one percent of the loan amount.
Does a construction loan charge an origination fee on the full commitment or on the amount drawn?
Commonly on the full commitment, paid at closing, because the lender underwrites and reserves the entire amount even though the balance is drawn over time.
Related Terms
- Basis Point
- Bridge Loan
- Maturity Date
- Construction Loan
- Bridge and Debt Fund Loans: Extension Tests, Notice Deadlines and What Trips Borrowers
- Real-Time Prepayment Calculations: Why Your Prepay Estimate Is Wrong and How to Fix It
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.
Sources
- LoanBoss CRE Debt Glossary