What is the primary purpose of a loan origination fee?

The primary purpose of a loan origination fee is to compensate the lender for processing the loan application. This fee is typically calculated as a percentage of the total loan amount and reflects the costs associated with evaluating, underwriting, and preparing the loan for closing. By charging this fee, the lender ensures that it can cover the administrative costs related to the loan creation process, which includes verifying the borrower's creditworthiness, conducting background checks, and finalizing the necessary documentation.

While borrowers may encounter various costs during the mortgage process, including appraisal, inspection, and insurance fees, these are typically distinct from the loan origination fee. The origination fee is specifically meant to address the lender's internal costs and is not allocated for closing costs or specific third-party services. Understanding the function of this fee is essential for borrowers as they navigate the loan approval process.