Closing costs are a combination of service fees and taxes collected at the final stage of a real estate transaction.
When you buy a home in California, local government entities are paid a portion of taxes before a change in ownership takes place. Vendors that provide real estate services — the things that make sure the deal is on a sound footing (title companies, lenders, etc.) — are paid at closing.
Both buyers and sellers are responsible for certain closing costs during the final stage of the home buying process called escrow. There are two stages of the escrow period: the beginning of escrow and closing of escrow.
Here are a few characteristics of closing costs paid during the escrow period:
- Fees and deposits are costs that are separate (over and above) the down payment amount
- Fees and taxes vary by location (state, county, and city)
- Who pays what is negotiable, thought local norms are typically followed without much variance
Beginning of Escrow
There are a few expenses buyers will incur prior to closing during the beginning of escrow period.
After a buyer makes an offer that is accepted by the seller, buyers will need to make an earnest money deposit on the home (a.k.a. good faith deposit) which tells the seller you are serious about buying the property. In turn, the seller will pull the home from the market and make it unavailable for other buyers to place offers on it. Earnest money is usually refundable; you can put yourself in the best position to get your deposit back by following the terms and conditions itemized in your offer letter. The typical earnest money deposit is 1% of the purchase price.
Buyers also have few non-refundable expenses at this stage, the home inspection, and appraisal. Inspections identify any problems with the home (plumbing, electrical, roof, etc.) and the appraisal is an estimate of the home’s current market value.
Closing of Escrow
If the home appraises as expected (read about what happens when appraisals come in low) and all the contingencies are met (such as repairs to issues that surface during the inspection, agreed-upon move out date of the seller, etc.), then the deal moves into the closing of escrow period.
What follows are the expected closing cost for home buyers and sellers in California (and, practically speaking, the rest of the United States) during the closing of escrow period.
Closing Costs for BUYERS in California
Home buyers can expect closing costs in California to average 2% to 3%. There are two types of expenses: one-time (non-recurring) and recurring (pro-rated or ongoing). For example, if you buy a home in the Bay Area for $800,000, your one-time and recurring closing costs would range from $16,000 to $24,000. Let’s break out the fees by each type.
Non-Recurring Fees
These are the fees that are paid only once.
- Downpayment (a percentage of the home’s price, varies depending on mortgage program requirements)
- Escrow Fees
- Escrow – the fee paid for escrow services
- Title Insurance – a search of the title’s history ensures that the title is free of defects like liens or other encumbrances. The ensuing insurance policy is paid by the buyer/borrower and protects the lender in case of unforeseen issues with the title arise.
- Notary – the cost to verify signatures
- Recording – fee for recording the change of ownership with the county government
Lender Fees
- Mortgage origination – fees paid for originating the loan
- Underwriting – the administrative cost of evaluating the borrower and the property
- Processing – covers the paperwork and deal management
- Flood certification – a risk assessment of the property
- Discount points – fees to “buy down” the current market interest rate on a mortgage
- Mortgage insurance – typically required by lenders when down payments are less than 20% of the purchase price of the home
Recurring or Prorated Fees
Recurring fees are items you can expect over the course of home ownership like property taxes. At closing, some funds are pulled aside to pay the first few installments of these ongoing expenses. This makes for smoother transition for the new home owner while they adjust to a new payment schedule. You may hear the professionals working on your deal use words like “impounds” or “reserves” to refer to the collection of these upfront, prorated fees.
Generally, three months of home insurance and six months of property taxes are collected at closing. The lender collects the money and then disburses it on your behalf each month. This way, you won’t get hit by a big property tax bill all-at-once.
- Prepaid mortgage interest – pays the interest portion of the monthly mortgage payment for the current month
- Property taxes – usually six months of taxes will be held in an impound account
- Hazard insurance – homeowner insurance premium
- HOA dues – enough to cover the first two months
Closing Costs for SELLERS in California
Home sellers in California can expect closings costs that average from 5% to 9%.
- Broker’s Commission – the fee charged by the listing broker for marketing the property that is typically split evenly with the seller’s broker
- Title Insurance – assures the buyer that they’ll take possession of real property that is unencumbered by title defects like prior liens. Seller pays for the buyer’s policy
- Documentary Transfer Tax – a governmental tax on the transfer of real property, over and above any lien, also called a real estate transfer tax in other states
- Seller Concessions – any fees the seller agrees to pay on behalf of the buyer such as prorated property taxes, mortgage discount points, or a home warranty
- Escrow – pays for escrow services and additional items like document preparation
- Attorney – paid to the attorney that represents the seller, if applicable
