What is a Loan Application Fee?
A loan application fee is charged to a potential borrower for processing and underwriting an application for a loan, such as a mortgage or car loan. These fees are intended to pay for the costs of approving the loan, but many people view them as unnecessary or overly costly.
Key Takeaways
- A loan application fee is an up-front, usually nonrefundable charge for submitting a loan application like a mortgage.
- Critics often argue that application fees are unnecessary “garbage fees,” inflating the closing costs to benefit lenders.
- Comparing fees across lenders can save you significant amounts of money, and some lenders might even waive an application fee upon request.
Demystifying Loan Application Fees
Loan application fees are one type of charge borrowers might incur when seeking a loan. Unlike other types of loan fees, the loan application fee is typically an up-front, nonrefundable charge required when submitting a loan application. Loan application fees can vary widely by lender, and some lenders don’t charge them at all.
Since most loan application fees are nonrefundable, they pose a high risk, especially for borrowers with lower credit scores. Therefore, it’s essential to first check your credit score and understand the requirements of the loan you’re applying for to minimize the risk of losing the application fee if your loan application gets rejected.
It’s also advisable to compare application fees across various lenders since these can range anywhere from $0 to $500 for mortgage loans. Researching different loan options and their associated fees can potentially save you hundreds of dollars. Some lenders might even agree to waive the application fee if you negotiate or present better offers from other competitors.
Special Considerations
Online lenders generally offer the lowest application fees, thanks to automated processing which cuts down the expenses associated with traditional and in-person consultations. Loan application fees are most commonly associated with mortgage loans, which include many extra fees aside from the monthly interest. If you’re working with a mortgage broker, the chances of encountering an application fee increase since brokers act as intermediaries for both the borrower and the lender.
Types of Loan Fees
Loan application fees are just one type of fee lenders may charge. Other fees might include an origination fee and monthly service fees. Generally, these fees help the lender cover the costs involved in underwriting and processing the loan.
In the mortgage market, fees tend to be most extensive. Mortgage lenders might charge origination fees, appraisal fees, and administration fees. Some lenders bundle their fees by charging a closing points fee, which is a comprehensive fee calculated as a percentage of the loan’s principal balance.
Sometimes, the loan application fee is seen as a “garbage” or “junk fee,” unnecessary charges tacked onto mortgage closing costs by lenders. These fees often increase a lender’s profit at your expense. Lenders have various ways to include such garbage fees in the closing costs required for processing the loan.
Related Terms: origination fee, credit score, closing costs, mortgage, application fees.
References
- Consumer Financial Protection Bureau. “What Are Mortgage Origination Services? What Is An Origination Fee?”
