How Much Are Buyers Closing Costs in California?

Closing costs are expenses beyond the purchase price that buyers and sellers incur to finalize a real estate transaction. These fees are paid at the close of escrow, when the property title officially transfers. Understanding these costs is important for budgeting, especially for California home buyers. This article details the various closing costs buyers may encounter when purchasing a home in California.

Components of Buyer Closing Costs

Buyer closing costs include various fees and charges, each serving a distinct purpose. These broadly categorize into lender fees, title and escrow charges, prepaid items, and recording fees.

Lender Fees

Lender fees compensate the financial institution for processing the mortgage. An origination fee, typically 0.5% to 1% of the loan amount, covers administrative costs like underwriting and application processing. Buyers also pay an appraisal fee, averaging $400 to $1,000 in California, to determine the property’s market value. A credit report fee, generally $10 to $250, obtains the buyer’s credit history. Discount points are an upfront payment to reduce the mortgage interest rate.

Title and Escrow Fees

Title and escrow fees facilitate the legal transfer of property ownership. Title insurance protects the buyer and lender against future claims regarding the property’s title. In California, buyers often pay for the lender’s title insurance policy, while the owner’s policy may be split or paid by either party. Escrow fees cover a neutral third party managing funds and documents until closing, often split between buyers and sellers. Notary fees cover legal witnessing and certification of documents.

Prepaid Items and Escrow Account

Prepaid items and initial escrow account setup are additional closing costs. Prorated property taxes cover the buyer’s portion from the closing date until the next installment. Buyers pay the first year’s homeowner’s insurance premium at closing. Lenders require an initial escrow account, with several months of property taxes and homeowner’s insurance premiums paid upfront. This account ensures future tax and insurance payments are made on time.

Recording Fees

Recording fees are charges by county or local government to officially register property ownership transfer and the mortgage lien. These fees cover publicly recording the new deed and mortgage documents. Amounts vary by county, often with a base fee for the first page and additional charges per subsequent page. Some state-mandated fees may also be added.

Homeowners Association (HOA) Fees

Properties within a homeowners association (HOA) may incur additional fees. These include initial HOA dues, prorated for the closing month, and transfer fees. HOA transfer fees cover administrative costs for updating association records. While California law requires these fees to be “reasonable,” they typically range from $100 to $500.

Factors Influencing Closing Cost Amounts

Buyer closing costs in California vary significantly, influenced by several factors.

Purchase Price and Loan Amount

The home’s purchase price and loan amount are primary determinants of closing costs. Many fees, like loan origination fees and some title insurance premiums, are calculated as a percentage of the loan or property value. A higher price or larger loan results in higher percentage-based fees. For example, a 1% origination fee on a $500,000 loan is $5,000, compared to $7,000 on a $700,000 loan.

Property Location

Property location also significantly influences closing costs. Local taxes, such as city or county transfer taxes, can add to buyer expenses in certain California areas. While sellers typically pay transfer taxes in California, buyers may incur a portion depending on negotiation or local ordinances. Some cities have municipal transfer taxes in addition to county rates, increasing the overall tax burden.

Lender Choice

The chosen lender influences the overall cost structure. Different lenders have varying fee schedules for similar loan products. Some may charge higher origination fees with a lower interest rate, while others waive fees for a slightly higher rate. Comparing Loan Estimates from multiple lenders helps buyers select the most cost-effective option.

Property Type

The type of property purchased also affects closing costs. New construction homes may involve additional fees like builder-related or community development charges. Condominiums or planned unit developments incur HOA-related fees, including initial dues and transfer fees, unlike single-family homes without an HOA.

Understanding Your Closing Cost Estimates

Buyers learn about estimated closing costs through official documents provided during the loan application and closing process. These documents provide transparency regarding financial obligations.

Loan Estimate (LE)

The Loan Estimate (LE) is a document buyers receive from their lender shortly after applying for a mortgage. Lenders must provide this estimate within three business days of receiving an application. The LE details loan terms, projected payments, and an itemized list of estimated closing costs.

The LE includes several key sections:
Section A (“Origination Charges”) outlines lender fees like origination fees and discount points.
Section B (“Services You Cannot Shop For”) lists costs for lender-selected services, such as appraisal and credit report fees.
Section C (“Services You Can Shop For”) includes costs for services like title insurance and escrow fees, where buyers can choose providers.
Section E (“Taxes and Other Government Fees”) details recording fees and transfer taxes.
Sections F and G (“Prepaids” and “Initial Escrow Payment at Closing”) cover items like homeowner’s insurance premiums and initial escrow contributions for property taxes and insurance.

Closing Disclosure (CD)

The Closing Disclosure (CD) is the final document providing actual loan terms and closing costs. Buyers receive the CD at least three business days before closing, allowing time for review and comparison with the Loan Estimate. This document presents the definitive amounts for all closing costs. The CD mirrors the LE’s structure, simplifying comparison.

Estimated vs. Actual Costs

Distinguishing between estimated and actual costs is important, as figures may change from the LE to the CD. Fees in “Services You Cannot Shop For” have limited tolerance for change, remaining close to the estimate. Costs for “Services You Can Shop For” can fluctuate more significantly based on chosen providers. The CD represents the final, legally binding statement of all costs.