What does an application fee generally cover?

The application fee typically covers the costs associated with loan origination. This fee is charged by lenders to process a borrower's application for a loan, which includes expenses related to evaluating the borrower's creditworthiness and financial situation, as well as initiating the loan approval process. This process often involves various administrative tasks, credit checks, and may also include preliminary underwriting efforts.

While other costs such as loan servicing, collateral evaluation, and legal documentation are important parts of the lending process, they are usually not covered by the application fee. Loan servicing costs relate to the management of the loan after it has been approved and closed, collateral evaluations pertain to the assessment of the assets securing the loan, and legal document preparation fees typically arise later in the loan process when finalizing the loan agreement. Therefore, the application fee is primarily focused on the initial stages of obtaining a loan, making the distinction clear that it's linked to origination costs.