California Closing Costs Explained: What Buyers Actually Pay Besides the Down Payment

Lender and loan-related costs

• Origination, underwriting and processing fees — the lender's charges for making the loan. These vary widely; as a broker we show you the wholesale lender's fees side by side rather than one lender's price sheet.
• Discount points — optional prepaid interest to lower the rate. One point is 1% of the loan amount. Whether points make sense depends on how long you expect to keep the loan.
• Appraisal — an independent valuation ordered by the lender; the fee depends on property type and location.
• Credit report, flood certification, tax service — small third-party fees.
• Upfront mortgage insurance or funding fee — FHA loans carry an upfront mortgage insurance premium, and VA loans a funding fee (waived for some veterans); both are usually financed into the loan rather than paid in cash.

Title, escrow and recording

• Lender's title insurance policy — protects the lender against title defects; the buyer pays this on a purchase loan. The owner's policy, which protects you, is customarily paid by the seller in most Southern California counties and by the buyer in many Northern California counties, but the contract governs.
• Escrow fee — the neutral escrow company's charge for handling funds and documents. Commonly split between buyer and seller in Southern California; customs vary by county.
• Recording fees — county charges to record the deed and the deed of trust.
• Transfer taxes — the county documentary transfer tax is customarily a seller cost in much of the state; some cities (Los Angeles, San Francisco, Oakland, Berkeley and others) add a city transfer tax whose payer is set by local custom and negotiation.
• Notary and courier fees — for signing and shipping documents.

Prepaids and impounds: the part that surprises people

Prepaids are not fees — they are your own future expenses collected at closing.

• Prepaid interest — interest from your closing date to the end of that month. Closing late in the month means less prepaid interest but your first payment comes sooner.
• Homeowners insurance — the first year's premium is paid at or before closing.
• Impound (escrow) account reserves — if your loan has an impound account, the lender collects a cushion of two to several months of property taxes and insurance so the account can pay the bills when they come due. How many months depends on when in the tax year you close. Impound accounts are required on most FHA and VA loans and on many loans above 80% loan-to-value; on others they may be optional, sometimes with a small pricing adjustment for waiving them.
• Property taxes at closing — prorated between buyer and seller as of the closing date, based on the seller's current tax bill.

The supplemental tax bill

California reassesses a property at its purchase price when it changes hands. Because the county's regular bill is still based on the seller's old assessed value, you will receive a separate supplemental tax bill — usually a few months after closing — for the difference, prorated for the remainder of the fiscal year (July–June). It is not paid from your impound account unless you arrange it, so set the money aside. Some areas also carry Mello-Roos or other special assessments that show up on the regular bill; ask for the property's tax bill during escrow.

How seller credits and lender credits reduce cash to close

Two tools can cover part of your closing costs:

• Seller credit — negotiated in the purchase contract, the seller pays a set amount toward your closing costs. Loan programs cap this: conventional loans generally allow 3% of the price with less than 10% down, 6% with 10–25% down and 9% above that; FHA allows up to 6%; VA has its own rules. Credits cannot exceed actual costs and cannot be applied to the down payment.
• Lender credit — you accept a slightly higher interest rate in exchange for the lender covering some costs. This is the mirror image of paying points and can make sense if you expect to sell or refinance within a few years.

Your Loan Estimate shows the Cash to Close figure that combines down payment, closing costs, prepaids and any credits. That number, not the fee list, is what to compare between lenders.

A worked example (illustrative only)

Purchase price $800,000, 20% down ($160,000), loan $640,000, closing on the 20th of the month, impound account established:

These ranges are for illustration only; your Loan Estimate will show actual figures for your loan, county and closing date. Rates and fees change daily and vary by lender.