Breaking Down Closing Costs in California
After Hawaii, the housing market in California is the most expensive in the country. According to the California Association of Realtors, the state's median home price was $818,260 in May 2021. California homebuyers must include in closing expenses one to three percent of the purchase price when saving for a 20% down payment, which can be a huge undertaking accomplishment.
In addition to the down payment, closing costs include all fees associated with the final phases of a house acquisition. Depending on where you live in California, that may consist of everything from your lender's origination charge to the purchase of earthquake and home insurance before you move in.
Rather than paying each service provider individually, all of these costs are bundled together and paid in full at the end of the project.
So, how much are California's closing fees? Whether you're a first-time buyer or a seasoned veteran, you'll find all you need to know about closing costs and how to save thousands of dollars on this crucial phase in the home buying process in our guide.
Who Pays For Real Estate Closing Costs In California?
In the last stages of a real estate transaction, fees and taxes are collected as part of the closing costs.
Taxes are paid to municipal governments in California before the transfer of ownership takes place. Real estate service providers, including title companies, lenders, and other service providers, are paid at closing.
During escrow, the final step of the house buying process, both the buyer and the seller are jointly responsible for several closing costs.
To get a general idea, here are some prices for buyers and sellers:
- Title search: From $500 to $1,000
- Title insurance: From $1,200 to $2,800
- Appraisal fee: From $200 to $600
- Property inspection fee: From $300 to $800
- Recording fee: From $8.50 to $10 a page
- Origination fee: From $800 to $950
- Surveying fee: From $500 to $900 based on size of land
- Settlement fee: From $400 to $700
- Property tax: Prorated at closing
- Broker fees: Usually 6% of sales price
- Own attorney: It varies
- Transfer tax: Mainly $1.10 per $1,000 of purchase price
- Property tax: Prorated at closing, if applicable
- Document preparation fee: From $150 to $250
- Recording fees: Around $125
- Escrow fees: It varies
- Mortgage payoff: Subject to loan balance
Closing Costs for Home Buyers in California
California's closing expenses can range from 2% to 3%, depending on the state. There are two types of costs: one-time and recurrent (pro-rated or ongoing). One-time closing fees for an $800,000 Los Angeles property would be between $16,000 and $24,000, depending on the type of property you purchased. Let's look at the many types of fees.
Non-recurring fees are fees that are paid only once. The following are non-recurring fees.
A downpayment is the first payment paid when a loan is taken out to purchase a product or service. Depending on a mortgage program's requirements, the percentage of the home's price that must be put down varies.
This fee is normally paid evenly between the buyer and seller. Choosing a title firm is something that both the buyer and the seller must agree on before moving forward. You may suggest one business to your seller or builder.
Legally, escrow fees are neither controlled nor mandated by the state. Some title companies in California charge a portion of the sale price, often around one percent, while others charge a flat fee for their services.
Escrow, as mentioned before, is the fee paid for escrow services.
A search of the title's history guarantees that there are no problems in the title, such as liens or other encumbrances. The buyer/borrower pays for the subsequent insurance coverage, which covers the lender in the event of title complications.
This is the cost of verifying signatures.
This is the cost of notifying the county government of a change of ownership.
Credit Report Fee
Before making a loan offer, your lender will verify your credit score during the underwriting process. You can expect the lender to pass this $25 cost on to you. If there are several borrowers, this cost will be multiplied by two because your lender will need to pull both of your credit reports.
Land surveys are required for single-family residences in only two states: Florida and Texas. Your lender may want you to employ a surveyor to determine property lines and validate your property's boundaries if you have huge acres of land to work with in California.
A surveyor may be hired to go over the property, draw common fences, and locate any unusual boundaries. Expect to pay between $300 and $500 if it is necessary.
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Recurring or Prorated Fees
Property taxes are an example of recurring costs that you can anticipate to pay throughout your house ownership. Some funds are set aside at the end of the transaction to pay the first few installments of these continuing expenses. This allows the new homeowner to adjust to a new payment schedule with less difficulty. The collection of these upfront and prorated payments may be referred to as "impounds" or "reserves" by the specialists working on your agreement.
At closing, three months' worth of home insurance and six months' worth of property taxes are usually collected. The lender collects the funds each month and disburses them on your behalf. You won't face a large property tax bill all at once this way.
Prepaid Mortgage Interest
When a borrower pays interest on a loan in advance of the first planned payback date, it is known as "prepaid interest." Mortgage prepaid interest is the daily interest that accrues on the mortgage after it closes until the first mortgage payment is due each month.
The Mello-Roos tax, which may or may not be imposed on homebuyers in California, is another oddity of the state's real estate market. A special tax can be levied on citizens of your local city, county, or school district to help pay for community infrastructure projects.
The amount of this tax varies from project to project and from location to location. A Mello-Roos Community Facilities District is an additional cost you should be aware of if you're looking at a property. You'll be able to get an idea of your annual tax bill if that's the case.
First-time homebuyers can get a taste of homeownership's financial benefits by paying property taxes. Fortunately, property taxes in California are limited to 1% of the assessed value of your home at the time of purchase, thanks to Proposition 13, which prevents property taxes from rising. Owners paid around 3% of their home's worth in property taxes each year prior to its 1978 adoption. You can expect to cover this cost in full at closing with a prorated refund.
Damage to a property due to fires, strong storms, hail, sleet, or other natural disasters is covered by hazard insurance. The insurance company will compensate for any damages caused by a specific weather event as long as the specific weather event is included in the policy coverage.
Condo or HOA Dues
Clubhouses, pools, parks, fitness facilities, garbage removal, security, and fire alarm systems are all included in HOA fees. If your neighborhood has a lot of bells and whistles, you'll have to pay extra in HOA fees. In communities with older structures, these costs tend to climb as more maintenance is needed.
HOA transfer fees will be paid for by your seller, as will any outstanding balances. After that, it's your responsibility to make all further payments on time. You should inquire about HOA fees as soon as possible if you're considering purchasing a house.
Lender fees include:
Mortgage Origination Fee
Regardless of where you plan to buy a home in the state – or elsewhere in the country – you'll need to secure a mortgage to get started. Unless you're paying cash, loan origination fees are one of the first costs you'll see on your closing costs bill. Fees for originating a loan are referred to as mortgage origination fees.
The cost of appraising the borrower and the property is known as underwriting.
Processing entails the handling of paperwork as well as transaction management.
A flood certification is an assessment of the property's danger of flooding.
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Discount points are expenses used to "buy down" a mortgage's current market interest rate.
Lenders often require mortgage insurance when down payments are less than 20% of the home's purchase price.
Closing Costs for House Sellers in California
California's closing costs are typically roughly 0.8 percent of the home's sale price, not counting broker fees. With a median property value of $758,360, sellers can expect to receive $6,338 at the closing table. The following are elements that are part of every closing cost process for house sellers.
Commissions paid to the realtor(s) or real estate broker—normally around 6% of the sales price (3% to the buyer's broker and 3% to the seller's broker)—are the most expensive part of selling a home. The sales agent negotiates commissions, which are usually split evenly with the buyer's agent.
Even so, the property can be sold "for sale by owner" to avoid broker commissions, however, this technique can result in lower sales prices and a longer time on the market in some situations.
Title Search & Title Insurance
You must affirm that you will own the property free and clear when you purchase it, whether it is a new build or an existing home. You'll need to pay your title company to run a title search to guarantee the land you're buying doesn't have any outstanding liens or lawsuits.
Buyers traditionally pay for the title search, which can cost hundreds of dollars depending on the complexity of the property's historical documents. Keep in mind that your title firm will have to search records for at least the previous three decades.
Following the completion of the title search, your lender will want you to purchase title insurance as a precaution. If the title search misses something, title insurance provides a second layer of protection, ensuring that you are not held liable for any unexpected costs.
Documentary Transfer Tax/California Real Estate Transfer Tax
All but 13 jurisdictions require homebuyers to factor in "real estate transfer taxes" when calculating their closing expenses, and California is one of those places. When a seller transfers ownership of their home to a buyer, they must pay transfer taxes to the local and state governments.
Your closing costs bill may include a deed tax, a mortgage registry tax, or a stamp tax. For this type of property transfer, a recording fee may be required in some places, such as California.
You may be hit with both county and local transfer taxes at the same time if you live in California. According to the California Revenue and Taxation Code, the current state tax rate is $1.10 per $1,000. The property transfer tax for a $600,000 residence would be $660.
Then there are the city and regional transfer taxes to consider. ClosingCorp data shows that Alameda County, California, has the third-highest closing expenses in the United States. There are transfer taxes of $12 per $1,000 of the home's worth in this jurisdiction.
If you're looking to buy a home in Southern California, you may breathe a sigh of relief because the seller generally pays this fee, but you should always verify the transfer tax rates before bidding on a home, so this tax doesn't catch you off guard.
Also, buyers may have to foot the bill for this if they ask for additional concessions, such as a price reduction, from the seller.
Closing fees that the seller has agreed to pay are known as seller concessions. You might be able to persuade the seller to cover some of the closing costs. Sellers may also elect to pay a percentage of the total closing fees.
During the beginning of the escrow period, buyers will have to pay a few expenses. As soon as the seller accepts a buyer's offer, they will need to make a good faith deposit or earnest money to show the seller that you are serious about purchasing the property.
As a result, the seller will remove the property from the market, preventing other potential purchasers from making an offer. If your deposit is refundable, following the terms and conditions outlined in your offer letter will put you in the greatest position to get a refund of your money. One percent of the total purchase price is typically required as an earnest money deposit.
Even if you don't need a lawyer to draft or analyze contracts or certify deeds or other legal papers, you may want to consider hiring one. They'll see to it that your agreements are unbreakable.
The cost of a lawyer in California depends on where you live, how many hours you may need their services, and their hourly charge. Legal fees for real estate transactions in California can range from a fixed cost to an hourly rate of up to $30.
Appraisal and Home Inspection Fees
An appraisal and a home inspection are two of the milestones that must be passed before your lender will release the funds for your new house.
An independent appraiser will visit your new house before the loan closes so you can be confident it's properly valued. The lender wants to know that they can sell the house if you default on your mortgage, so it's an important stage in the home-buying process.
In order to ensure that your new home is in good working order, you'll need to employ a professional home inspector. For example, a house inspector can also point out any flaws that the seller should be aware of and address before the sale closes.
These professional evaluations are your responsibility to pay for in both circumstances. In California, you can expect to pay up to $1,000 per service.
How To Reduce Your Closing Costs in California
How can you reduce your closing costs in California? Here are some tips for reducing them:
1. Negotiate Fees
It's good to carefully review your lender's Closing Disclosure paperwork to see what fees and services they require you to pay.
It's possible to ask your lender not to include some costs in the final bill, or to request that these costs be paid in installments throughout the home-buying process rather than all at once at closing.
2. Take Advantage of Closing Cost Assistance
As a buyer, you may be able to defer some or all of your closing costs into your mortgage. In this case, you won't have to foot the bill for these costs on closing day, but your monthly mortgage payments will be a little higher to make up for it. When you take out a mortgage, you'll pay interest on the closing charges that were slapped onto it.
Consult with your lender to learn if this is an option. Some closing fees, such as homeowner's insurance, must be paid in full upfront, so don't count on them all being included.
3. Negotiate Seller Concessions
When you're dealing with a seller that is eager to sell, you may have more wiggle room for bargaining because of California's unique legislation and norms about who pays for what.
Negotiate some of your closing expenses with your real estate agent, whether you're purchasing a new house from a property developer or a home that has been on the market before.
To help with the closing costs, your seller may offer to cover your HOA dues or your first year of insurance. It's possible that you and your builder can come to an agreement to cover your closing expenses if you're purchasing a new house but need to make renovations.
4. Opt Into a No-Closing-Cost Mortgage
In a no closing cost mortgage, your lender pays all of your closing expenses, so you don't have to come up with any money of your own. A no-closing-cost mortgage can help you get into your dream home. Be aware the interest rate on your loan might be greater.
5. Add the Closing Costs To Your Home Financing
The term "rolling them in" or adding costs refers to the process of including closing fees in your loan balance. "No-cost refinance" may be the term used by lenders to describe it. The downside of no-cost refinance is you get higher monthly payments.
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What To Know About Buying or Selling a Property in California
A few rules and principles must be followed when purchasing or selling real estate in California.
California Law Doesn’t Require the Buyer And Seller To Physically Meet
There is a chance that you will never meet the other party in person. Real estate brokers and agents (on behalf of buyers and sellers) frequently ask questions and negotiate on behalf of their customers.
As soon as the sale and escrow have been completed, you will receive your new home's keys.
Unlike in Most States, Buyers and Sellers Can Be Represented By The Same Real Estate Broker
It is possible that your broker is a "dual agent" or a "dual-agency partnership" if you have two agents working for the same broker.
If you accept, both parties must sign a written agreement. In order to identify the brokers and agents engaged in the transaction, you must fill out a Disclosure Regarding Real Estate Agency Relationships form.
Depending On Where You Live, You Might Need to Pay the Mello-Roos Taxes
As mentioned before, Mello-Roos taxes are utilized to develop municipal infrastructure under the Community Facilities Act. They can be used for a variety of purposes, including the construction or repair of roads, sewers, and other sanitary infrastructure, as well as the funding of police protection and the upkeep of public spaces like parks and schools.
Ask if the property is in a Mello-Roos Community Facilities District before making an offer. As a precaution, inquire about the annual special-tax payment and include it in your financial planning.
Consider Earthquake, Fire, and Flood Insurance
When it comes to home insurance in the United States, floods, forest fires, and earthquakes are not covered by the conventional policy. They must be purchased separately and added to your current policy as an endorsement.
Even if you don't live in the state, they're a must-have. It's still up to you to pay your mortgage if your house is destroyed in an earthquake if you don't have earthquake insurance coverage. Also, you'll have to foot the bill for repairs and rebuilding. Your home insurance carrier in California must offer you additional coverage to protect against earthquakes under state law.
These extra insurance plans could cost you several thousand dollars or more if you reside in a high-cost area. The higher your insurance premiums will be in California if your home is located on a fault line. For example, it is estimated that the average cost of earthquake insurance for a single Alameda home is $2,744.
Closing costs in California may be among the most expensive in the country. In general, you may expect to spend between 0.98 percent and 1.15 percent of the sale price on fees; however, some fees are negotiable, and others are set. Due to the hefty cost of closing, it's well worth your time to shop around for the best mortgage rates. Consider all of your possibilities before making a decision about where to live.
If you have any further questions, please contact our team at Sell My Home Fast and let us assist you.