Closing costs in California typically average around 2.5% of the home's sale price for the buyer and around 7.5% for the seller. For example, if a house sells for $500,000, the buyer's closing costs would come out to around $12,500, while the seller's closing costs would be approximately $37,500.
However, you should keep in mind that California closing costs vary significantly depending on various factors, including the home's final sale price, the transaction's complexity, and what the buyer and seller negotiate. For example, if the seller doesn't use a real estate agent, they will save 5-6%, lowering their closing costs significantly.
Remember that, unlike the down payment, closing costs are not put toward paying down your loan balance. These are separate fees paid to financial institutions and service providers who help process the transaction and close the sale. So, you must save room in your budget for these additional costs.
- Real Estate Commission
- Title Service Fees
- Owner's Title Insurance
- Transfer Tax
- Recording Fees
- Miscellaneous Fees
1. Real Estate Commission
The biggest closing cost for sellers in California is the real estate commission, which is usually between 5% and 6% of the home's selling price. This fee can be negotiated, and some sellers can avoid it altogether by selling by owner, but studies show that selling with a realtor is worth it in the long run as you'll get a higher price, which will more than cover this fee.
2. Title Service Fees
When you sell a home, you must transfer the title to the new owner, which requires a title search to verify the ownership and ensure there are no outstanding issues or liens. Typically the buyer and seller will both pay for a title search in California, which is usually around 0.3% of the home price.
3. Owner's Title Insurance
Title insurance protects you if there are any mixups and someone else has a claim to the home's title. Although uncommon, errors in ownership transfer and the chain to title do occur and can be expensive to solve. So the owner will be responsible for taking out their own title insurance policy, which is usually somewhere around $500 to $1,000.
4. Transfer Tax
California charges a tax to transfer your home to a new owner. The current tax rate is $1.1 per every $1,000 in assessed value or about 0.11%. So if the home is worth $1 million, the tax would be around $1100.
5. Recording Fees
California also charges a fee to record your deed and mortgage information with the local authority. The fee varies depending on the location but typically comes out to about $200 to $300.
6. Miscellaneous Fees
Additional fees are always required at closing that are unique to the transaction. For instance, if it's a slow market, the seller may offer incentives to the buyer to entice them to make an offer, which will be paid at closing. Also, if their seller has any outstanding homeowners association fees, mortgage prepayment fees, or outstanding property taxes, they will likely be due at closing.
- Appraisal Fee
- Home Inspection Fee
- Loan Application Fee
- Credit Check Fee
- Origination Fee
- Lender's Title Insurance
1. Appraisal Fee
You'll be required to get an appraisal if you finance the purchase of the home to confirm to the bank that you didn't offer too much. The cost of the appraisal is the responsibility of the buyer and typically costs about $300 to $500.
2. Home Inspection Fee
In addition to having the price evaluated, you'll also want to have its condition inspected during the due diligence period. Similar to the appraisal fee, the cost of a home inspection is the buyer's responsibility and typically costs about $300 to $600.
3. Loan Application Fee
Mortgage lenders will often require you to pay a fee to apply for a mortgage to cover the costs required to underwrite the loan. The exact fee will vary depending on the lender issuing the loan but is usually anywhere from $200 to $500.
4. Credit Check Fee
The bank may also charge the buyer a fee to pull their credit report, which is separate from the application fee. Some lenders will waive the credit check fee, but it's typically at most $100.
5. Origination Fee
An origination fee is the cost of creating a new account with a lender and is separate from an application fee. An application fee isn't always required and is charged anytime you apply for a loan. An origination fee is higher and is required when you proceed with a loan. It's usually around 1% of the loan amount, which would be $5,000 for a $500,000 loan.
6. Lender's Title Insurance
Just like the homeowner, the lender will also want protection if there is an issue with the title. The cost of the lender's title insurance policy is typically covered by the buyer and is typically around $500 to $1,000.
- Shop Around For the Best Rates
- Negotiate with the Seller or Buyer
- Look For Down Payment Assistance
Closing costs can often be a significant burden for new homebuyers, who may have already spent their life savings on a down payment. Therefore, many first-time homeowners want to know how they can reduce their closing costs when purchasing a home in California. Certain costs are set in stone, while others are more flexible. Here are a few tips for reducing your closing costs.
1. Shop Around for the Best Rates
Many of the closing costs for buyers in California come from getting a loan. If you shop around at different lenders, you may find some who are willing to waive application fees, credit check fees, and other costs related to obtaining a loan.
2. Negotiate with the Seller or Buyer
If you have the upper hand in a negotiation, you may be able to persuade the other party to cover some of your closing costs. For instance, if you are a buyer and you know the home has been on the market for a while without offers, you may use this to your advantage to negotiate a buyer's incentive.
3. Look For Down Payment Assistance
There are plenty of programs out there that help first-time homeowners and other borrowers reduce their closing costs, often in the form of forgivable grants and low-interest loans. You'll have to do your research and make sure you qualify, but this can be a great way to reduce your financial obligations at closing.
Closing costs are an annoying yet necessary expense related to buying or selling a home in California. As a seller, you can avoid some of the highest closing costs, like the real estate commission, but it's not always worth it. And as a buyer, you'll need to ensure you have enough cash to cover your closing costs on top of the down payment. The main thing is that you budget for closing costs so that you are not surprised when it's time to pay them.