Loan origination fee is a fee that you pay a mortgage loan officer to work on your loan. It is necessary for the loan officer to be paid – their family needs to eat too. The loan officer generally receives their payment in one of two ways, either through loan origination fee, or through yield spread premium. Loan origination (LO) fee is a fee that you pay them through closing costs, whereas yield spread premium (YSP) is an amount that the lender pays them. These are often referred to as ‘the front’ and ‘the back’.

You should realize that the loan officer rarely gets to keep the full amount that they are paid through LO fee and YSP. The amount is split with the company they work for. They may get to keep as low as 50%.

You may have an option of getting the higher interest rate if you do not want to pay any fee, including the origination fee, up front. The loan counselor is able to structure the deal so that you don't have any fees on front, and lets them roll into a slightly higher interest rate.

Since loan origination fee is part of closing costs, it is tax deductible. Depending on whether the transaction is a property purchase or a refinance, loan origination fee is deductible entirely for the year it is incurred or equally throughout the loan term. Always consult a tax accountant before taking any such deductions.

While banks normally don't disclose a Yield Spread Premium or YSP, they will receive a similiar type of compensation on top of an origination fee that they may charge. The compensation they receive is referred to as an SRP or Service Release Premium. They recieve this compensation when selling your loan on the secondary market. More often than not, a bank will recieve a greater compensation on a loan in the form of an SRP over a mortgage broker's YSP.

Many times the loan origination fee is used to cover the overhead associated with generating the loan. Be sure to ask your mortgage professional if your origination fee is a set percentage or if it varies from customer to customer.

Click here to return to the Home Page.

This is not a commitment to lend. Restrictions may apply. Information is subject to change without notice. All loans are subject to credit approval. Equal Housing Opportunity.
Other Websites:
Loan Officer | Commerical Finance Readiness | What Length Mortgage Loan Should I Get | Non Warrantable Condos | Housing Bubble