Closing costs are fees paid by the buyer and/or seller from funds that have been deposited in escrow.
Closing costs generally total around 1% to 2% of the home purchase price, and the buyer and seller apportion these costs between them according to the purchase contract — most contracts simply use local custom for the apportionment between buyer and seller. For example, in Contra Costa County, it is common for the buyer to pay the escrow fees and title insurance costs, whereas the seller pays for the County transfer tax. Here is a useful website charting these customs in Northern California: NorCal Closing Cost Allocation Chart.
And there are many other closing costs as well. Here’s a breakdown of the most common closing costs and fees with a rough estimate of average cost in Northern California:
HOME INSPECTION-RELATED CLOSING COSTS
* Home inspection ($300 – $500) – This fee is paid by the buyer who hires and pays for a licensed contractor to inspect the property. The contractor prepares a written report (often with photos) to chronicle any needed/recommended home repairs, including any safety issues as well. The home inspection becomes part of the official disclosures on the property.
* Wood Destroying Pest Inspection ($125 – $200) – This report is generally paid for by the buyer or the seller. The inspector is a licensed contractor who inspects the property and prepares a report chronicling any evidence of termites, dry rot or other wood damage. Like the home inspection report mentioned above, this termite inspection report also becomes part o the official disclosures for the property.
* Natural Hazards Disclosure Report ($120)– This is usually purchased by the seller. It’s a long disclosure document covering miscellaneous facts about the geographical area and local governance, such as natural hazards (i.e., earthquakes), airports, taxes, etc.
* Home Warranty ($300 – $400; optional) – Often a seller, or a buyer’s agent, will pay for a 1-year home warranty to benefit the buyer. This is an insurance policy for the buyer to cover appliances for the first year of home ownership. Additional items beyond appliances can be added to the policy if desired.
* Survey Fee ($200 – $400; optional) – This fee goes to a survey company to verify property boundaries. In the average home purchase, this is not required. It is only required if the buyer or lender require it by contract.
* Home Owners Association Documentation and Transfer Fees ($400 – $600; obviously $0 if no HOA) – Often the Seller will pay for these fees paid directly to the HOA covering the property. The HOA documentation fees are almost always paid upfront by the seller, whereas the separate HOA transfer fees are paid out of escrow funds at close of escrow. The HOA documentation includes things like bylaws, CC&Rs, HOA financial statements, minutes and notices.
TITLE AND ESCROW RELATED CLOSING COSTS
* Escrow Fee ($1,000 – $2000, or more specifically calculated around $2.00 per thousand dollars of purchase price plus $250) – This is paid by the buyer or seller (per contract and/or local custom) to the title company or escrow company.
* Lender’s Policy Title Insurance (around $800 for $750,000 home). The party who pays this fee varies by local custom. The fee itself is calculated from the purchase price off a rate table at the insurance company. This is insurance to protect the lender in the event a third party challenges the ownership status/title of the home.
* Owner’s Policy Title Insurance (around $1,900 for $750,000 home). The party who pays this fee varies by local custom. The fee itself is calculated from the purchase price off a rate table at the insurance company. This is an insurance policy protecting the buyer in the event a third party challenges the ownership status/title of the home.
* Courier Fee ($50; not always needed) – This covers the cost of transporting documents to complete the loan transaction as quickly as possible. The party that necessitates the courier pays for the service.
* Notary Fee ($50 – $100) – This is the cost to have a licensed notary oversee the signing of the closing documents just before close of escrow. This cost is usually split between the parties, or each party pays for their own notary signing.
* Recording Fees ($20 – $100) – This is the fee charged by the escrow company to record the new deed at the county. This can be paid by either the buyer or seller.
GOVERNMENT-RELATED CLOSING COSTS
* County Transfer Taxes ($1.10 per $1,000 in sale price) – This is the county tax due whenever title is passing from a seller to a buyer. This is paid by the buyer or seller (per contract and/or local custom).
* City Transfer Taxes (varies by city; sometimes no tax). Separate from the county tax, some cities (like Oakland, Berkeley, Hayward, and Alameda for example) charge their own separate city tax whenever title is passing from a seller to a buyer. This is paid by the buyer or seller (per contract and/or local custom). In Berkeley, for example, the city tax is $15 per $1,000 in sales price.
* Property Tax (varies due to closing date). The buyer is responsible for paying property taxes. And property taxes are 1% of the purchase price of the property per year, plus any extra sum for local bonds. With regard to how these are paid as closing costs — because property taxes are prepaid by the homeowner during the year of the sale, the buyer must compensate the seller at close of escrow with a prorated amount covering whatever sum that seller has prepaid the tax for that year. For example, if close of escrow is on June 1, and Seller already paid property taxes up until July 1, then the buyer must pay a closing cost credit to seller equivalent to one month of property tax.
* Credit Report ($30) – Buyer pays for a credit report from the three main credit reporting agencies (i.e., Experian), which is obtained directly by the Lender. Buyer cannot supply his own report that he obtains independently.
LOAN-RELATED CLOSING COSTS
* Appraisal Fee ($150 to $450) – This fee is paid by the buyer (or the buyer’s lender) to the appraisal company to confirm the fair market value of the home. This fee will generally vary based on the price of the home. Occasionally the lender will require this fee be paid upfront by the buyer, rather than at close of escrow.
* Escrow Deposit for Property Taxes, Mortgage, Insurance (varies widely) – Often the buyer is asked to put down two months of property tax and mortgage insurance payments at closing. These prepaid items usually include insurance premiums (for Homeowners Insurance — also called Hazard, or Fire Insurance — and Private Mortgage Insurance) and estimated Real Estate Taxes. Notably, HUD regulations limit the amount of money a lender may require the borrower to hold in an escrow account.
* Loan Processing Fees (around $900) – Oh, lending fees. This fee is paid by the buyer to his lender to pay the lender for processing the loan.
* Underwriting Fees (around $700) – This fee paid by the buyer goes to the buyer’s lender, covering the cost of researching whether or not to approve the buyer/property for the loan.
* Loan Discount Points (zero to two percent of loan amount) – This fee is paid by the buyer. Points are often referred to as ‘prepaid interest’. The key thing to know is that one point is equal to one percent of the loan amount. So for example, 1.25 points is equal to 1.25% of the loan amount.
* Pre-Paid Interest (varies depending on loan amount, interest rate and time of month you close on your loan) – This fee is paid by the buyer to cover the mortgage interest up through the first of the month.
* Real Estate Agent Commissions (3% of purchase price) – The seller pays the commissions of any licensed real estate agents identified in the purchase contract, including the buyer’s agent (if any). The average real estate commission is 3%.
Greg Glaser, Attorney at Law
San Francisco Bay Area – Northern California
Flat Fee Packages Available for Buyers and Sellers Without a Realtor
For Sellers: www.GregGlaser.com/FSBO.html
For Buyers: www.GregGlaser.com/buying-a-home-without-a-realtor.html