Understanding California closing costs in real estate

Buying a house is a major purchase. In fact, for most people, it will be either the largest or one of the largest purchases of their lives. It can be easy to become fixated on that big number that you’ll be paying down for many years to come. However, even that big number doesn’t tell the whole story.

For one thing, it doesn’t include the seller closing costs and buyer closing costs.

What are closing costs in California?

Closing costs in real estate can be a confusing topic for the average home buyer because many different fees can be considered home sale closing costs. To demystify seller closing costs and buyer closing costs, let’s go over some of the fees you can expect to pay and touch on how much money you should be ready to spend on closing costs.

Closing costs real estate price

Before going into all of the individual closing costs you may encounter as a home buyer, let’s take a moment to look at the big picture. When it comes to average closing costs there’s no specific number you should be targeting as a few factors play into how much you’ll likely have to pay for your closing fee:

• Location: As is true with almost every aspect of real estate, location matters. Closing costs vary quite a bit depending on what state you live in. As of 2019, closing costs were highest in New York and Delaware with the averages in both states over $13,000. California’s average closing tends to be slightly under $10,000 to rank ninth among all states.
• Price of the home: One reason that closing cost prices can change so much from state to state is that the value of homes varies from state to state. As a general rule, you can expect your closing costs to total somewhere between 2% and 5% of the value of the purchase price.
• Loan type and amount: The type of loan you opt for and the loan amount play a decisive role in determining closing costs. Different loan types carry distinct fee structures, with certain charges calculated as a percentage of the loan amount.

These are some big numbers to be dealing with and can lead to a sense of sticker shock if you’re not prepared. The price of closing costs may be able to be added to the total of your home loan or may be paid in cash, but either way, the closing fee price is something you need to factor in when determining your budget. We also suggest consulting your real estate agent when dealing with closing costs. When hiring a real estate agent, it is important to understand the difference between a listing agent vs selling agent.

Logistics of closing costs

Now that you have a broad idea of how much closing costs may be, you may still have some questions about how they get paid. Let’s address a couple of common questions.

Who pays closing costs?

Your first question in regards to closing costs may very well be who is responsible for paying them. Do these costs affect buyers or sellers? The answer is both.

While many of the total closing costs will fall on the buyers of a new home, there are also real estate closing costs that the seller will have to pay. Also, who pays certain closing fees may vary based on where you purchase your home.

When do you learn what your costs are?

You will not officially know what your real estate closing costs are until three days before you close on the home. The official closing fees will be contained in a document called your closing disclosure.

While this is when you’ll receive your final costs, you will be able to get a sense of what your costs will be much earlier. When you fill out a loan application, your lenders have three days to provide you with a loan estimate document. This document will have an estimation of your buyers closing costs and sellers closing costs included.

Categories of closing costs

Not all closing costs are the same. Some are fees. Some are taxes. Some are just costs associated with buying the house. As such, you may be able to lower or even fully avoid certain closing costs, while others will have to be paid. The categories mortgage closing costs tend to fall into include:

• Up-front costs: Often associated with the loan process these include a loan origination fee or a fee to cover a credit check. You have to pay these up-front before you can continue the process of securing a loan.
  
• Pre-paid recurring fees: Things like taxes and insurance need to be paid even while the process of transferring ownership is occurring. These fees will often be factored into your loan so that your lender can pay them while ownership is transferred. You will then have to continue paying these fees once you become a homeowner.
  
• One-time fees: There are also costs like agent commissions and transfer tax fees that will only need to be paid once at the time of closing. Unlike the recurring fees, you will not have to continue paying these once the house’s ownership has been transferred.

Typical closing costs

Hopefully, you’re getting a better sense of what you may be in store for when it comes to mortgage closing costs. To prepare you further, it’s worth going into some of the specific costs that are typically associated with a home sale. Each sale is different, so having a professional to help you go over your costs can ensure you’re not paying more than you have to.

At Berkshire Hathaway HomeServices California Properties, we’re experts in all things real estate. We’ll go over your costs with you and provide you with options to help you deal with everything around closing.

Buyer fees

Let’s start by looking at some of the costs likely to be taken on by the buyer of a new home:

• Title search and insurance: A title search will be done before closing to ensure there are no existing liens against the house or other legal issues. Sometimes, sellers may not even realize that these issues may exist so it’s important for the buyer and the lender to do a title search.
  
  This aspect of the buyer closing cost is similar in that it will cover the lender up to a certain amount in the case there is another claim to the property or other legal issues like unpaid taxes. Your lender will generally help you find title insurance, but you can also shop around to see if you can find a better rate.
  
• Origination fees: Just the process of taking out a home loan requires a lot of paperwork and a lot of people working on the bank’s side. To pay for all this, you will be charged an origination fee by your lender. Lender fees may also be covered by a point system on the loan. One point is equal to 1% of your loan amount so the lower the points, the lower the origination fee.
  
  It is also possible to have no-point loans, but this is likely to come with a downside. Normally, the lower the points, the higher the interest will be on the loan. You’ll have to decide whether this trade-off is worth it given your own financial situation.
  
• Application fee/Credit check: These are other fees associated with taking out your loan. Some banks may simply lump these in with your origination fee. Others may charge these separately.
  
• Home inspection/appraisal/property survey: These are fees you may or may not pay as part of your buyer closing cost depending on your situation. You may opt for an inspection to make sure there are no underlying issues with the home you are buying. An appraisal may protect you from overpaying. And a property survey may be needed so you know exactly what you are buying.
  
• Homeowners insurance: You will have to secure and start paying your homeowner’s mortgage insurance before closing on the home. You will then continue to pay this as long as you own the home.
  
• Homeowner’s association fee: These will only apply to people purchasing a home that falls under the jurisdiction of an HOA. If so, initial fees will be included with your closing.
  

Shared fees

These fees could be covered by the buyer, the seller, or both depending on the situation:

• Transfer tax: This is a specific tax levied by the government when ownership of a home is transferred. It is not the same as property tax. The buyer and seller can often work out who will cover this tax or how they will split the payment.
  
• Recording fee: Similar to the transfer tax (and in some areas covered as a part of the transfer tax), a recording fee is a fee levied by the local government to cover the processing of any paperwork needed to officially transfer the deed.
  
• Agent fees: Assuming both parties used real estate agents, they will each be responsible to pay their respective agents’ commissions upon closing.
  
• Escrow fees: Generally speaking, an escrow company will be hired to facilitate the sale of a home. They will conduct the closing and distribute all the fees for both the buyer and the seller. This is a valuable service, but will also cost money. The buyer and seller can work out how they will divide this payment.
  

Seller fees

Finally, let’s look at a couple of costs the seller may be responsible for:

• Existing liens: If the title search does find existing liens on the home, the seller will be responsible for paying these off before closing on the house.
  
• Mortgage payoff fee: When you sell your house, you will be responsible for paying off the remainder of your mortgage (any money from the sale that does not need to be put toward your mortgage reflects your equity and is yours to keep). Lenders may charge fees associated with paying off your loan. These fees must be included in your initial mortgage agreement.
  
• Repair costs (possible): Depending on what’s found during the inspection, a seller may be responsible for covering repairs. It’s also possible that the seller and buyer will factor this into a reduced overall price for the sale and the buyer will deal with any needed repairs after closing.

Strategies for effective management and negotiation of closing costs

Effectively navigating closing costs calls for a combination of practicality and negotiation skills. Implement the following strategies to help manage these expenses:

• Informed decision-making: Conduct your own research to compare various service providers, including appraisers, inspectors, and title companies. This will empower you to make well-informed choices tailored to your needs.
• Effective negotiation: Sharpen your negotiation skills. Some fees can be negotiated, and leading those conversations with service providers may lead to savings. 
• Understanding loan estimates: Thoroughly review the Loan Estimate (LE) provided by your lender. This document offers a projection of anticipated closing costs, so you have a transparent financial breakdown. 
• Exploring service options: Consider shopping around for specific services like title insurance. Doing so can ensure you’re getting the best deal in your closing costs.
• Leveraging seller assistance: Depending on market conditions, explore the possibility of seller assistance. This cooperative approach can alleviate a portion of your financial responsibility.

Comparing closing costs across property types

Closing costs vary based on both property specifics and property types, such as condominiums compared to single-family homes:

• Condominiums: Condominiums introduce association fees, covering shared community amenities and management expenses that contribute to your overall closing costs.
• Single-family homes: Single-family homes present their own dynamics, often entailing higher property tax and insurance premiums, which can influence your closing costs.

The role of realtors and loan officers

Expertise is a cornerstone when it comes to navigating the landscape of closing costs:

• Guidance from realtors: Seasoned real estate agents can help you decode the language of fees, negotiate on your behalf, and ensure clarity throughout the process. Take advantage of the benefits of working with a real estate agent in this process.
• Insight from loan officers: Trusted loan officers can help you secure optimal financing and also provide guidance on managing closing costs. They simplify complex fee structures so you can feel confident and make sound decisions.

The significance of loan estimate (LE) and closing disclosure (CD)

Two pivotal documents, the Loan Estimate (LE) and Closing Disclosure (CD), play a critical role in comprehending closing costs:

• LE as an initial guide: The Loan Estimate provides an initial breakdown of anticipated closing costs, serving as your initial financial guide.
• CD for transparent disclosure: The Closing Disclosure presents a detailed list of closing costs. It is delivered three days before closing and offers transparency and a chance for clarification.

Understanding the process with California Properties

Closing costs can seem complicated and if you aren’t familiar with them, it can be overwhelming, especially when added to all the other considerations of buying a house. The agents at California Properties are here to help. Our expertise allows us to clarify all closing costs for you and make sure you are only paying what you need to and don’t get taken advantage of. If you’re also wondering, “what is fixed rate mortgage,” or what the difference is between under contract vs pending contract, we’ve got you covered!

Make your real estate transaction as straightforward as possible with California Properties.

Sources: US News, US News, US News, LA Times, LA Times, SF Gate