Homebuyer Closing Costs for a Residential Real Estate in California

Average Closing Costs for California Home Buyers
How Exciting!  You just got your loan pre-approved from a mortgage company you diligently screened.  As of this moment, you and your realtor have the confidence to begin searching for homes in the gorgeous state of California. In all likelihood, it'll be in Los Angeles, Orange County, San Diego, or the Bay area.

Saving for a down payment is not an easy thing to do, but once you have done that and maximized your credit score,there's one more number you need to understand. How much are closing costs going to be on the home I am buying in California?

The majority of lenders will inform you the closing costs will be between 3% to 5% of the home's value. What makes up the closing costs?

Let's look at a typical transaction in Orange County, CA. Based on data from Zillow, the median home value in the California is about $548,000 as of May 2019.  In Orange County, the median home value is $721,500.  For the purposes of this article, we will calculate estimated fees based on the Orange County value, and predict a conforming loan in the amount of $649,350.  (90% loan to value).  Although there are 3-percent down loan programs too.

Earnest Money Deposit
You found the perfect home in your favorite South Orange County neighborhood through your preferred real estate agent. Your Realtor will prepare the legally binding California Association of Realtors Residential Purchase Agreement and Escrow Instructions with a purchase offer for $721,000.00 along with other pertinent information

As soon as the contract is signed by the buyer and seller, an earnest money payment is required by the buyer within a specified period.  Normally, home buyers give a deposit of 1% to 2% of the sales price payable to the settlement/closing agent. This deposit needs to come directly from the buyer's bank account or other confirmed funds. It is not technically a cost, but it acts like a cost since it’s needed to close the transaction.

Once the purchase closes as scheduled, the buyer will receive credit on the closing disclosure and settlement forms for the earnest money deposit on the closing date.

Home Inspections
A physical home inspection is not required but isn't a cost to skip. The buyer should have as much knowledge as possible about the structure and quality of the home.  A professional and good real estate agent will see to it that happens.  The reason is not all defects or conditions are easily visible to the average home buyer.

The inspection fees range from $300 to $1500 and are commonly paid by the buyer prior to the home being inspected. It is worth noting this expense is non-refundable if the buyer chooses not to proceed with the purchase.

Buyers normally don't proceed if the inspection reveals material defects and the cost to remedy is substantial and the seller will not partially pay for it.  The purchase agreement you and the seller signed will indicate a firm time period in which all inspections, and objections to inspection findings, need to be completed, disclosed and addressed to the seller.

Lender Fees and Loan Costs
These fees will be due and payable at the closing appointment, and calculated into what the buyer's cash to close will be.  Third party fees, such as the credit report ordered by your lender ($50) and appraisal fees from a local licensed appraisal company ($550 - $900), are commonly added into this category. Get an closing cost estimate days before you close your loan.

Discount Points
This cost is optional for the buyer, but it may turn out to be a very wise decision to lower the mortgage interest rate it to keep your payments low for the long term. One point is equal to one percent of the loan amount.


Title Insurance fees
Title insurance companies trace the history of the current owners, mortgages, liens and other encumbrances on the property. Their job is to ensure the buyer receives a clear title commitment on their new home and the lender is protected.  

Although fees for title insurance can be negotiated in California, the buyer customarily pays for the loan policy premium and fifty-percent of the settlement closing agent fee, along with other fees such as deed and mortgage recording to the County recorder's office. The seller usually pays for the property transfer tax fee.

Solving The Buyer's Regret Condition

Some people in California have second thoughts about purchasing their home once they've have some time to think more about their major purchase.

Nonetheless, in contrast to pants, a jacket or an HD smart TV, you are not allowed to return a house after you've purchased it. You are able to make improvements to bring it to more of your liking, if it is not what you were planning on, try to sell it with a new buyer and move on to the next. Either way, time and money will be needed to get the home you'll appreciate for years to come.

Instead of buying a home you may feel disappointed about after you move in, consider these guidelines to avoid buyers remorse:

Know who your neighbors are
During the home showing peak out side to see who the neighbors are. If they are not seen during the home viewing or inspections ask your real estate agent. Is it a family, a bunch of roommates who are college-aged,  older couple, a guy who works from his garage using power tools during the day. Find out their schedule.

Plan for a resale in the future
Although you may have always wished to have a pool in your yard, you have to consider whether that pool will be as valuable to home buyers when you sell. It’s almost always a drawback to a couple with a young kid.  If you still want the pool consider the costs to fill the pool with cement or dirt 3- to- 6 months before you sell. 

Take into consideration your drive
A home that comes with all the features you want for an excellent price can turn into an issue if you need to drive sixty minutes or more in stop and go traffic every day for work. The same can be said if you have to drive more miles just to get to the supermarket and other common retail stores.  Know your wants and needs so you are not dissatisfied later on.

Evaluate the home completely
When you attend an open house, take a look at every area in the home. You simply cannot ignore small details of the home you may buy. Look at all the walls carefully, open every door, and if you don't like the kitchen cabinets or bathroom design, weigh your options.

If you're thinking about buying a home after seeing it during an open house, several other prospective buyers may be touring the home the same time as you. Take your time but also consider scheduling a private tour with the agent.

Get a home inspection
Because some negative conditions in a home aren't noticeable to the common person. Prior to signing the final closing papers to buy the home, get theproperty inspected by a professional. These professionals will give you a report that lets you know if there is mold, water damage or other concerns that may discourage you from buying.

What is an ARM’s Length Transaction

If you're not up to speed with the term, you may be curious what an "arm's length" has to do with a home sale?

An Arm’s Length Transaction
In regards to buying and selling real estate, an arm's length transaction is one where the parties involved in the contract have no relationship to each other that would have an impact on their decisions during the purchase/sale of a property. A "relationship" can include: family members by blood or by marriage, business associates, beneficiaries, or even people that share a common business interest with each other.

In an arm's length transaction, all parties are deemed to have equal bargaining positions, unclouded judgment, and equal knowledge of the property being sold. Without a pre-existing relationship, it's confirmed that buyers and sellers will act in their best interest with no pressure.

When an arm's length transaction takes place, the sale typically reflects the home's proper market value. Since taxes and fees are based on a property's sale price, the government has a vested interest to ensure transactions are at arm's length.

Non-Arm's Length Transactions
When the sale of a home occurs and two or more parties have a pre-existing personal or business relationship that may be a conflict of interest, it is a non-arm's length transaction. This may also be called "identity of interest".

In a circumstance such as this, the property's sale price commonly varies from the present market value, and the loan may be regarded as high risk by the lender. Because of the increased likelihood of kickbacks, straw man buyers, inflated sale prices, fraud, and other adverse influences, lenders need to examine these loans more thoroughly.

Lender Restrictions & Requirements
When a borrower is searching for FHA financing in a non-arm's length transaction, a higher down payment is normally an underwriting condition. Rather than being approve to borrow as much as 96.5% of the home's value, a buyer may only be approved for up to 85% LTV (loan to value).

Sometime during the transaction, buyer(s) have to fill out an Identity of Interest Certification to reveal any relationships; so it's wise to take care of it upfront if there's an existing conflict of interest.
Do not forget with regards to short sales, FHA will not allow any relationships.

VA loans likewise has limitations on non-arm's length transactions, but only in certain situations. This can be found out by contacting a knowledgeable VA home loan lender.

As expected, Conventional financing will also have their restrictions on non-arm's length transactions, but it's not as firm as an FHA or VA loan. When it comes to a short sale transaction, guidelines call for an arm's length transaction affidavit to confirm there is not any relationship between the buyer and seller.

The affidavit states that there are no hidden/implied terms or special understandings between the parties that have not been included in the contract or otherwise disclosed. Disclosing false information on this form could make you liable for mortgage fraud.

The affidavit also has conditions that prevent any proceeds from the sale to be given to the buyer or seller directly or indirectly. The same language applies to the seller's agent. In a short sale, the seller is basically walking away from the property with nothing. Furthermore, the seller is not permitted to rent or live in the property post-closing.