A Dummies Guide to Origination Fees

If you get money from a hard money lender for an investment property, you will hear the words “Origination Fee” or “Points”. But what exactly is an origination fee? How much is it? How do you compare it between lenders? And, can you avoid paying it? This article has the answers:

What’s an Origination Fee?

An origination fee is simply what a hard money lender charges for the work of originating/issuing their loan. That includes sourcing the deal, processing it, and funding it. It is usually paid when you close on the property, and it is calculated as a percentage of the loan amount.

Also Called Points

Conversationally, people call it “points.” So if a lender says, “We charge two points,” it means “Our origination fee is 2% of the loan amount”. You might also hear “basis points,” which is another way to say the same thing: 200 basis points (or 200 bps) is the same as a 2% origination fee. But “origination fee” is the more formal phrase that you’ll see on your loan documents.

Typical Origination Fees

Depending on the lender, the loan amount, the loan type, and your financial situation, the origination fee will come in somewhere from 1–4%. Most lenders charge 2–3%. Some go lower. Backflip, for instance, offers the most experienced flippers an origination fee of just 1.25% on its Standard Loan, and often goes below 2% if you already have a couple of flips under your belt and good credit. On the other end, lenders can go up to 4% for a loan with a higher risk profile or small size. Private money lenders who loan amounts below $50,000, might even charge 10% on the loan!

Look at the Whole Picture

But don’t just go immediately for the lender with the smallest fee. Sometimes, their closing costs aren’t the cheapest overall. It’s smart to look at what isn’t covered by the lender’s origination fee, and compare the total closing costs, if that’s most important to you. Consider a 2% origination fee on a $120K loan, which comes to $2400. At Backflip, the additional fees will be an Underwriting Fee, Appraisal Fee, and Legal Review/ Doc Prep fee, which together might total another $2400. 

To help you make sure you have enough for closing, Backflip will always give you a breakdown, as well as estimating your outside costs, such as Title, Survey, and Escrow fees, as well as first month’s interest, broker fee, insurance, and Earnest Money Deposit if the seller requires it.

Avoiding the Fee

If you’re trying to avoid paying an origination fee you can try negotiating with your lender to waive it in exchange for a higher interest rate. But even if the lender is willing (unlikely), run the numbers to confirm that it makes sense for your deal. With Backflip, there are two much easier ways to avoid paying origination. The first is by accruing Backflip Rewards on the app, which you can convert into cash at closing to cover your origination fee. The other is with our Zero Gravity loan, where interest, origination fee and other lending fees are capitalized into the loan, and not due until your investment property is sold and you get paid.

The More You Know

Origination fees don’t make or break a deal, but understanding the lingo and nuances of fees helps you when negotiating a loan and allows you to make informed decisions that align with the goals on your investment journey. We hope this has been helpful—let us know!

By Page Buckman, a Loan Account Executive at Backflip,  previously Account Executive and Sales Manager at Better

Disclaimer: This article is for informational purposes only and is not legal, financial or investment advice. To obtain advice tailored to your particular circumstances, you should consult a licensed professional advisor.