What is a loan application fee?
A loan application fee is charged to a potential borrower for processing and underwriting a loan application, such as a mortgage or car loan. A loan application fee may be charged for all types of loans and is intended to pay for the costs of the loan approval process, but is considered by many observers to be unnecessary or too expensive.
Key points to remember
- The loan application fee is an initial fee, usually non-refundable, for submitting a loan application, for example for a mortgage loan.
- Some critics say the application fee is an unnecessary “garbage fee” that fills the pockets of lenders and increases closing costs.
- Comparing fees can save you hundreds or even thousands of dollars, and you can even avoid paying application fees to some lenders.
Understanding Loan Application Fees
Loan application fees are a type of fee that borrowers may be charged for obtaining a loan. Different from other types of loan fees, loan application fees are an upfront, usually non-refundable fee that borrowers are required to pay when submitting a loan application. Loan application fees vary by lender, and many lenders will not charge any loan application fees.
Since most loan application fees are non-refundable, they pose a high risk to borrowers with low credit quality. Therefore, borrowers should first do their due diligence on their own credit score and standard approval requirements for the type of loan they wish to obtain to ensure that application fees will not be incurred. lost if a credit application is rejected.
Borrowers should also look to compare application fees between lenders. Loan application fees can vary widely with different types of lenders, ranging from $0 to $500 for a mortgage. So, researching loan options and application fees from various competitors can potentially save hundreds of dollars. Some lenders may also be willing to waive application fees by negotiation or comparison with other fees in the competitive market.
Online lenders typically charge the lowest application fees, thanks to automated processing that doesn’t require some of the extra expense associated with traditional, in-person loan consultations. Loan application fees are usually the most common in a mortgage, which includes many one-time fees in addition to monthly interest. Working with a mortgage broker can increase the likelihood of loan application fees because the broker works as an intermediary on behalf of the borrower and the lender.
Types of loan fees
Loan application fees are just one type of fee that lenders may charge on a loan. Other fees may include setup fees and monthly service fees. In general, fees help a lender cover the costs associated with underwriting and processing a loan.
In the credit market, mortgages tend to have the broadest fee requirements. Mortgage lenders may charge origination fees, appraisal fees and administration fees. In some cases, a mortgage lender may bundle their fees together by charging a closing point fee, which is an aggregate fee calculated as a percentage of the principal balance.
Loan application fees are sometimes considered garbage or junk fees, which are often unnecessary fees and charges that are added to mortgage closing costs by lenders. Lenders do this to increase their own profit on the loan. There are a number of ways lenders manage to incorporate garbage fees into closing costs.