If you’re planning to use an FHA loan to purchase a home, you might have to pay an origination fee as part of your overall closing costs. It’s a common expense paid by mortgage shoppers and home buyers, and it might cost you somewhere between 0.5% and 1% of the loan amount.
Here’s an updated look at FHA loan origination fees, guidelines, and average costs in 2016.
What Is a Loan Origination Fee?
An FHA loan origination fee is money charged by the lender for making or “originating” the home loan. It covers some of their preliminary expenses, such as application processing, underwriting, and other administrative services. These charges might be itemized (broken down individually) or presented as a single number.
When you submit an FHA loan application, the lender will give you a “Loan Estimate” form (explained here) that lists some of your anticipated closing costs. The origination fee will show up in page 2, section A of the form.
The Loan Estimate form is designed to help you shop around for the best offer. According to the Consumer Financial Protection Bureau: “The best way to tell if you have a competitive loan offer is to compare it to Loan Estimates from other lenders … make sure to compare the origination charges.”
Under current lending laws, the origination fee listed in the Loan Estimate cannot increase at closing (except for in a few circumstances). In most cases, the fee estimated up front is the same — or nearly the same — as the one that is actually paid on closing day.
How Much Do They Cost, on Average?
The size of an FHA loan origination fee can vary based on the lender. According to a 2015 lender survey conducted by Bankrate.com, the average origination fee on a $200,000 loan was $1,000. That comes to 0.5% of the amount borrowed. But again, it will vary based on (A) the size of the loan, (B) the state in which you reside, and (C) the lender’s business model.
FHA origination fees are typically expressed as a percentage of the total loan amount. On average, they can range from 0.5% to 1% of the amount being borrowed. So, based on this calculation model, a larger loan will usually have a higher origination fee attached to it.
HUD Guidelines for FHA Origination Fees in 2016
The FHA loan program is managed and overseen by the Department of Housing and Urban Development (HUD). It is HUD that establishes all guidelines and requirements for the program.
According to HUD Handbook 4000.1, the Single-Family Housing Policy Handbook, mortgage lenders may charge a “reasonable” origination fee in accordance with the Real Estate Settlement Procedures Act (RESPA).
Just don’t go digging through these laws and handbooks looking for specific origination fee limits or caps. You won’t find any. But you will find a lot of vague language that says lenders can charge fees that are “competitively priced” and “reasonable.”
Elsewhere on the HUD website, there’s this explanation:
“This fee is usually known as a loan origination fee but sometimes is called a ‘point’ or ‘points.’ It covers the lender’s administrative costs in processing the loan. Often expressed as a percentage of the loan, the fee will vary among lenders. Generally, the buyer pays the fee, unless otherwise negotiated.”
This quote underscores a point made earlier — it is generally the mortgage lender that determines the origination fee assigned to an FHA loan. It is not dictated by the government, nor should it be. As such, these charges can vary and are usually negotiable.
In 2016, most lenders set their FHA origination fees somewhere between 0.5% and 1% of the loan amount. Example: When borrowing $300,000, a person might pay $1,500 – $3,000 to have the lender originate or create the loan. But it also varies by location, and some lenders are more competitive than others when pricing their services. So this is not a hard-and-fast rule. These are just trends.
Notes: This article pertains to FHA origination fees for regular home purchase loans. Additional guidelines or requirements might apply to other programs and products, such as the FHA 203(k) rehab / home improvement loan, reverse mortgages, etc. To learn more about this subject, you can refer to HUD Handbook 4000.1, also called the Single-Family Housing Policy Handbook. This handbook took effect in September 2015 and applies to all FHA loans originated in 2016. The information above has been provided as a general reference and does not constitute financial advice. We are an independent publisher not affiliated with HUD or FHA.