Who Pays Closing Costs in California?

Navigating a real estate transaction involves financial considerations beyond the purchase price. These additional expenses, known as closing costs, are incurred at the final stage of a property sale. Understanding who pays these costs is important for both buyers and sellers in California. California’s real estate market has specific customs and regulations influencing these fees. Closing costs typically represent between 2% and 5% of the property’s purchase price for buyers, and between 5% and 10% for sellers, though these percentages can vary based on location and specific transaction details.

Costs Typically Paid by the Buyer

Buyers in California generally pay closing costs related to securing a mortgage and ensuring the property’s condition. Loan-related fees are a significant portion of these expenses. Loan origination fees, charged by lenders for processing the mortgage application, often range from 0.5% to 1.5% of the loan amount. Borrowers may also choose to pay discount points, where each point, equal to 1% of the loan amount, can reduce the interest rate.

Lender-required costs include appraisal fees, typically ranging from $300 to $600, which assess the property’s market value, and credit report fees. Lender’s title insurance, protecting the lender’s investment, is customarily paid by the buyer. Buyers often prepay several months of property taxes and homeowner’s insurance premiums into an impound account at closing for future payments.

Buyers also cover costs for evaluating the property’s physical state. Home inspection fees, which are recommended, generally range from $300 to $700, depending on the property’s size and location. Specialized inspections, such as for termites or specific structural concerns, may incur additional charges. Recording fees are paid to the county to register the deed and mortgage documents. If the property is part of a homeowners association, buyers may also be responsible for HOA transfer fees.

Costs Typically Paid by the Seller

Sellers in California are responsible for a distinct set of closing costs associated with the transfer of ownership and the sale transaction itself. Real estate commissions typically represent the largest expense for sellers, covering the compensation for both the seller’s and buyer’s real estate agents. These commissions commonly range from 5% to 6% of the home’s sale price and are negotiable.

Owner’s title insurance, which protects the buyer from future claims against the property’s title, is another significant cost. While this policy is customarily paid by the seller in Northern California, its payment can be subject to negotiation in other regions of the state. Transfer taxes, also known as documentary transfer taxes, are levied by the state and sometimes by local municipalities on property sales. The state rate is typically $1.10 per $1,000 of the property’s value in most counties, with some cities imposing additional transfer taxes.

Sellers are also responsible for costs related to their existing financial obligations and the preparation of the property for transfer. This includes the payoff of their existing mortgage and any associated reconveyance fees to clear the lien from the property’s title. Any prorated property taxes and homeowners association dues for the period the seller owned the property up to the closing date are also adjusted and accounted for. Fees for providing necessary homeowners association documents to the buyer are typically covered by the seller. The seller’s portion of escrow fees, which cover the services of the neutral third party managing the transaction, also contribute to their overall costs.

Negotiable and Shared Closing Costs

Many closing costs in California real estate transactions are not fixed to one party and can be negotiated between the buyer and seller, or are commonly split. Escrow fees, which compensate the neutral third party that holds funds and documents until the transaction is complete, are frequently split evenly between the buyer and seller. This division is open to negotiation, allowing either party to potentially cover a larger share based on market conditions or specific agreement terms.

While specific title insurance policies are often assigned to either the buyer or seller, the choice of the title company can be a point of discussion. Certain endorsements or additional coverages within title insurance may also be negotiated or shared. The natural hazard disclosure (NHD) report, which identifies if a property is in a high-risk natural hazard zone, can be paid by either party, and its cost is frequently negotiated.

Home warranty plans, offering coverage for home systems and appliances post-sale, can be purchased by either the buyer or the seller for the buyer’s benefit. This often serves as an incentive during negotiations. Pest control or termite inspection and any necessary repair costs are often significant points of negotiation, especially if the inspection reveals extensive damage. Property tax prorations are inherently shared, as they involve adjusting the taxes for the current year based on the exact number of days each party owned the property. Buyers can also request seller credits towards their closing costs, effectively reducing the cash they need to bring to closing.

Understanding Your Closing Disclosure

The Closing Disclosure (CD) is a standardized five-page form provided by the lender that details all final terms and costs associated with your real estate transaction. This document itemizes every fee, charge, and credit, providing a comprehensive financial summary of the sale. It serves as a definitive record of the loan terms and closing expenses.

Lenders are legally required to provide the Closing Disclosure to the borrower at least three business days before the scheduled closing date. This mandatory review period allows adequate time to examine the document thoroughly before signing any final paperwork. It is important to carefully review key sections, including the summary of costs, the final loan terms, and the precise amount of cash needed to close the transaction.

A crucial step in reviewing the Closing Disclosure involves comparing it to the initial Loan Estimate (LE) that was provided earlier in the mortgage process. This comparison helps identify any significant discrepancies or unexpected changes in fees or terms. While minor adjustments for items like prepaid interest or property tax prorations are common, substantial increases in other fees should be questioned. Should any line item appear unclear or incorrect, it is advisable to contact the lender or escrow officer immediately for clarification. Ensuring the accuracy of numbers, the correct assignment of costs to the appropriate party, and the absence of any unanticipated fees is essential before proceeding to closing.