What is an origination fee?
The origination fee in a private mortgage (AKA hard money loan) transaction is a percentage of the loan amount which the lender charges just for originating the loan, which includes sourcing the deal, underwriting, processing, and all the other work involved in closing a loan. The origination fee is a profit for the lender, and without it, they would not be in business.
Origination Fee is Also Known As Points
Origination fees are more commonly known as “Points,” which is the term that most mortgage professionals use in conversations and advertising. The term “origination fee” is more formal and typically mentioned on the term sheet, loan documents, and settlement statement. You won’t hear a lender saying “We charge an origination fee of two point five percent of the loan amount.” Instead, they will likely say “we charge two and a half points.”
Origination Fee is Also Known As Basis Points
In commercial real estate deals, a lot of lenders and brokers use the term “basis points” which is just a different way of stating the percentage. So an origination fee of two and a half points may be stated as “250 basis points” or “250 bips” for short.
What are the typical origination fees for private mortgages?
In general, the typical origination fee for private lending (hard money) ranges from 1 to 4 points, and it can vary based on a number of factors, including the loan amount, the loan type, property type, location, and the borrower’s financial situation. The majority of lenders charge between 2 and 3 points.
You may find some lenders that charge 1 to 1.5 points, but this is not common. There are a few scenarios in which private lending companies may charge less than 2 points:
- Large loan amount, over $2,000,000
- Low Loan-to-Value
- High volume property investor doing many loans with the same lender
- Mortgage broker working with a lender that offers a wholesale pricing program
On the high side of the spectrum, you may find some lenders charging up to 4 points because of a low loan amount, or if the loan has a higher risk profile which many other lenders won’t consider. Some examples include:
- Rehab loan with high leverage (95-100% financing)
- Land Loans
- 2nd Mortgage
- Rural Location
- Unique Property Type
If a lender doesn’t have a lot of competition for the type of loan you’re seeking, they may charge higher origination fees just because they can.
There may be some cases where a lender would charge up to 10 points on a loan, but that’s likely to be for loans under $50,000. There are not many private lending companies out there that will fund less than $50,000, but we do have a handful listed on our website. For residential investment properties, most of the lenders in our network have a minimum loan amount of $100,000.
Origination Fee / Points Charged by Mortgage Brokers
What if you’re working with a mortgage broker and not directly with the lender? Mortgage brokers also charge an origination fee. As with lenders, the broker’s fee may vary based on the loan amount, but in general, most mortgage brokers charge 1 or 2 points for private money and hard money loans.
The broker’s origination fee may also depend on how many points the lender is charging. If a lender charges 2 points, the broker will typically be limited to charging 1 or 2 points. In many cases, the broker may not be allowed to charge more points than the lender’s origination fee. It typically has to be less or the same. We’ve seen some lenders have the policy to cap the total number of points that a borrower would pay, and those lenders may be flexible with their points to make sure the broker also gets a fair compensation.
There are some cases where the broker charges points, and the lender doesn’t charge any points at all. You typically see this happen when the lender is a high net worth investor or a family office investment firm that does not participate in the origination process because they are not qualified to, or because they don’t have a license and are not permitted by state law to collect an origination fee.
How to Avoid Paying an Origination Fee
If you are adamant about not paying any points, you may be able to negotiate with the lender to eliminate the origination fee and charge a higher interest rate instead. For example, if a lender quotes 8% plus 2 points, you can ask for 11% and 0 points.
This would only make sense if you’re positive that the loan will be paid off in a short period of time, but it also has to make sense for the lender, and there would likely be a minimum interest guarantee. Only a small percentage of private lending companies may consider this. Before you ask for this, run the numbers to confirm that it makes sense for your deal.
Origination Fee Structures
The lender charging the lowest number of points may not be the lowest-priced loan. There are many different ways in which lenders structure their deals, and there may be other fees charged in addition to points. Below is an example of 2 different origination fee structures.
Loan Amount: $200,000
- Origination Fee: 2 points
- Underwriting Fee: $1,000
- Processing Fee: $500
- Loan Docs Fee: $500
Total Fees: $6,000
Loan Amount: $200,000
- Origination Fee: 3 points
- Additional Fees: NONE
Total Fees: $6,000
In the example above, both lenders are charging the same amount of fees, but structured in a different way. Don’t write off a lender just because their points are higher than other lenders. You have to dig a little deeper and look at all the other fees the lender is charging.
How to Find Direct Private Mortgage Lenders
If you’re looking for a private lender to fund a specialty commercial property, use our website as a resource. There is no fee to search, and we have a filter you can use to find out which lenders consider specialty properties.
- Start at the Find a Lender page.
- Type in a state or major metro area, and click SEARCH.
- Look for the Points percentage range on each lender’s card in the search results.
- View each lender’s profile to learn about their guidelines, pricing and more. You’ll also find the Points range on the lenders’ profile, close to the top.
- Click the green CONTACT button and reach out to the lender directly.
The companies listed pay us a monthly advertising fee, so there is no cost to make contact through our website. Please remind each company that you found them on PrivateLenderLink.com.