Closing Costs in California: What You Need to Know

Many homeowners, especially first-time homebuyers, are caught off guard by their closing costs. In the simplest terms, closing costs are fees incurred when the title of a property is transferred from the buyer to the seller. Whether you’ve chosen to live in one of the new townhouse communities, a condominium, or a single family home, you will have to deal with them.

Nationally closing costs range between 3% and 5% of a home’s purchase price. In California it is typically more like 2% to 3%. If that still seems like a lot, well, you’re right. That is why you should always factor closing costs into the price of your home purchase. Fees and charges will vary by city and county.

What Costs Should You Expect?

Title insurance, inspection fees, document and transition stamps, attorney and notary fees, recording costs, survey fees, appraisal fees, and home warranties are all common expenses that are part of closing costs. Lender fees include processing, flood certification, mortgage origination, and processing. It can look like a cell phone bill. Regardless of if you’re buying from a private party or one of the California home builders, most or all of these fees will typically apply.

Understanding PMI

One big surprise that many first-time homebuyers face is private mortgage insurance (PMI). PMI is a requirement that lenders have if a buyer is putting less than 20% down on a conventional loan. A portion of your PMI is also required at closing.

The list of fees that can be included under the “closing costs” label is surprisingly long, and it is worth investing time to familiarize yourself with the different costs included. That way there will be no surprises on the day of the sale.

Sellers also Pay Closing Costs

On average, sellers in California pay more like 5%-9% of the cost of the home. There is typically the brokerage commission, which is paid by the seller to a real estate broker. Sellers are typically also responsible for the escrow fee, documentary transfer tax, title insurance, and often, even an attorney fee.

Fortunately, one of the benefits of buying a new home is the builder or lender will offer an incentive toward closing costs. The amount varies, but this can be very helpful in purchasing your first home or allowing you to buy more home with less cash out of pocket.

What is the Loan Estimate?

Another factor to keep in mind is that of a Loan Estimate or LE. The LE is essentially a list of various fees and costs associated with the loan. Your lender will provide you with an LE that will include a variety of fees; however, keep in mind that, as the name indicates, the LE is only an estimate. If you are buying directly from California home builders building homes or new townhouse communities, then be aware that changes to the LE can occur 60 days prior to your closing.

Closing costs catch a lot of people off guard, but you don’t have to fall into that trap. A little research and reading will help give you a rough idea of what closing costs are, what to expect, and how much the fees will likely be.