What is the purpose of a loan origination fee?

The purpose of a loan origination fee is to cover the costs associated with processing a new loan application. This fee is typically assessed by the lender and helps to pay for the various administrative tasks required to evaluate and underwrite a mortgage loan. These tasks can include credit checks, the preparation of necessary documentation, and other overhead costs associated with setting up a loan.

It's important for borrowers to understand that the loan origination fee does not directly go towards originating the loan itself in a tangible manner but instead facilitates the behind-the-scenes work that allows for the loan to be executed properly. By paying this fee, borrowers enable lenders to handle the initial steps that are essential for getting the mortgage approved.