Homebuyer Closing Costs in California: What to Expect and How Much to Set Aside
If you’re thinking about buying a home in the Golden State, you’ve probably been diving into the numbers, from home prices to mortgage rates. And as you progress through the process, you’ll also probably find yourself with another question in mind: how much are closing costs in California?
There’s a lot that goes into answering that question. But, to help make it all less confusing, we spoke with Gene Quisisem of Ajility Real Estate, to explain the factors that make up typical closing costs in California, what you should expect, and how much to put away.
Here’s what he told us.
SOMO Village: How would you describe closing costs in California? When you’re buying a home, what exactly does that mean?
Gene: So, closing costs—or costs to the buyer—are expenses that are not the deposit and not the mortgage amount.
The broad categories of closing costs in California are loan charges, impound fees, title, escrow and settlement charges, government recording and transfer charges, and then miscellaneous fees, or things that appear over the course of the transaction.
Do you ever deal with first-time home buyers who are surprised by closing costs in California?
Yeah. I think we work really hard as a professional community to prevent surprises and inform them as to what the fees and charges might be ahead of time.
Chatting about what those fees earlier in the process can prevent them from being surprised.
At what point in that process would you want to start thinking about closing costs in California?
It’s appropriate to talk about what closing costs and fees you might incur during your financial qualification process, after you’ve decided you want to buy something.
For example, if you believe that you can buy a home in this market, the next step is to have a conversation with your lending partner professional to help you understand precisely how much you can afford.
That conversation will include the down payment, what loan programs you might qualify for, an estimate as to what your mortgage amount will be, and what you can expect in terms of closing costs.
Can you explain the five broad categories of closing costs in California?
1. Loan Charges
These are fees originated by the lender and include things like prepaid interests, loan processing fees, and underwriting fees. An appraisal would be included in these fees, as this is a part of the service lenders provide.
This can also include document fees like credit reports, tax services and, depending on the lender, other credits or fees.
Prepaid interest is a prorated amount of interest for a period of time.
Your loans happen month-to-month. But when your purchase closes mid-month, your mortgage will accumulate interest for that prorated portion for the number of days in that month.
And so, depending on when your transaction closes, that cost can be very small or it could be somewhere in the middle.
Regardless, it’s usually included somewhere as a closing cost. So, it’s healthy to anticipate and budget an amount for that prepaid interest.
Loan processing fees are the cost that the lender charges to process the loan. It’s their administration fees.
Impounds are fees that are like a homeowners’ association or property taxes that the mortgage company will pay on behalf of the buyer.
The money is held in an escrow account and is paid by the lender.
For some properties, we have a homeowners’ association, which has a monthly fee.
And then property taxes, which, of course, vary depending on the property.
That amount is placed into an escrow account by the mortgage company or the lender and is paid monthly by the lender as part of the total monthly payment by the buyer.
Some neighborhoods have homeowners associations, some do not. Those more modern subdivisions will often have an association, generally maintaining the upkeep of the neighborhood. But it can vary depending on the neighborhood and the subdivision.
3. Title and Escrow Fees
The fees from the title and escrow company here in California would be included in our policies to insure a clear title.
And those fees will ensure a clear title for the mortgage holder, which is a loan policy.
Real estate has been held since the beginning of America. So, the ownership legacy in the chain can become unclear, particularly with a complex ownership structure that might be included inside of trusts in families and such.
Title fees are the fees you pay to insure that the property may be passed from one party—and that party may have lots of parties included in the title—to the next party. That clear title is important.
This is a lender requirement because if there’s a future claim and somebody says, “Well, I actually own that property,” that can be quite disruptive.
That’s the work of title. To ensure that it may be passed from one owner or group of owners, however that’s organized, to the next in a clean way.
Escrow is a neutral third party where money is held.
The mortgage company places money and the buyer places their deposit into an escrow account. And it’s the clearinghouse that transfers the money to the right parties over the course of a transaction.
You may also see fees like a loan service fee if there’s a loan associated with the title transfer, notary and document fees.
4. Government Recording and Transfer Charges
Government recording is also known here in Sonoma County as the Sonoma County Documentary Transfer Tax. Every time a property is transferred from one party to another, this tax is applied to the transaction.
There is a county transfer tax and some cities in Sonoma County has a City Document Transfer tax as well.
5. Miscellaneous Charges or Fees
There are a few things that might land in this category of closing costs in California, such as a home warranty.
Buyers will often insure against the systems of the home from failing because they’re buying a property from a seller.
For instance, you might want some assurance that if something was to occur, you have some coverage for that. So, we often see home warranties landing in there as a miscellaneous closing cost as it’s an opt-in by the parties to include that as part of the transaction.
What do you advise people to put aside in preparation for closing costs in California when buying a home? What are the average closing costs in California?
The general rule of thumb is to set aside between 3% and 5% of the purchase price for typical closing costs in California.
This is a broad number, and your lending officer will be able to give you a much more refined number as to what it might be for you.
Consult with your lender and title/escrow officer to search out strategies to help reduce those closing costs in California to help with these fees and costs. They will have some strategies and perhaps programs to reduce the amount of fees they may be subjected to over the course of their transaction.
There are programs that buy down rates and perhaps reduce closing costs in California that different lenders offer, as well as strategies to make buyers’ payments more affordable.
These can reduce closing costs, defer or repackage closing costs in a way that makes it more palatable.
Consumers can expect to see the full accounting and the estimates provided by their lender.
The lender will be the best resource to understand fully what their closing costs will be. Always ask your lender for a Loan Estimate. This is a standardized form that will give a detailed breakdown of loan fees and closing costs.
If you’re in the market to buy a new home, connect with Gene and his team at Ajility Real Estate today. You can visit his website at ajilityrealestate.com or get in touch with him at GQ@ajilityrealestate.com or 415-754-9224.
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About Gene Quisisem
Gene Quisisem is known as a real estate team builder and innovator. His professional background sets him apart from his peers—he has consistently led top-producing teams to outperform the competition time and time again. A deal-maker with a marketing background, he sees every obstacle from multiple perspectives. In his downtime, he loves to be outdoors, whether it’s hiking, biking in the mountains, or being near the water.