A Detail of Costs Involved in Buying a Home in Contra Costa County, California
The down payment is often the highest cost you will face as a homebuyer (unless you’ve used down payment assistance). Unfortunately, many first time buyers are surprised to learn that the down payment is not the only expense involved in purchasing a home. These additional expenses are collectively referred to as closing costs.
Closing Costs Explained
Closing costs are the fees and charges buyers face when purchasing a new home, on top of the down payment amount. The costs will vary based on where you live, the property you buy, occupancy type, and the type of loan you choose. Whether the buyer or seller pays which fees are negotiable; however, local market conditions will affect who has the greatest negotiating power. Also, local precedent is typically followed without many departures from the norm.
Homebuyers in Contra Costa County can expect to pay closing costs ranging from approximately 2% to 5% of the purchase price.
There are a few expenses buyers will incur at the beginning of the escrow period.
The first will be a “good faith” or earnest money deposit on the home as soon as your offer is accepted by the seller. The typical earnest money deposit is 1% to 3% of the purchase price. The deposit funds will ultimately be credited towards your loan down payment or closing costs. Don’t worry; your deposit is refundable based upon certain conditions of the purchase agreement. The best way to ensure your right to return of the deposit in the event something goes wrong is to appropriately fulfill your terms of the contract and within the proper time frames.
In return for your deposit, the seller will remove the home from the market, and escrow will be opened with a title or escrow company – in some cases, an attorney. The escrow holder oversees the closing as an independent party in your home purchase. They will be responsible for confirming all aspects of the contract have been met, and they will hold, coordinate, and release funds related to the transaction.
Following the deposit, there are other non-refundable expenses to be expected at this stage. These will often include, but are not necessarily limited to:
Pest Inspection. An inspection of a home for termites and dry rot is required in California and for government loans. Repairs can get expensive if evidence of termites, dry rot, or other wood damage is found. In this case, your Realtor will help you to negotiate the cost of the repairs with the seller, as necessary.
Home Inspection. A home inspection will identify any problems with the home’s systems like the plumbing, electrical, roof, etc. Just as with pest repairs, your Realtor will assist you in negotiating and arranging for any needed repairs.
Appraisal. This fee is paid to the appraisal company to confirm the fair market value of the home.
Escrow can be closed when all terms of the contract have been met. There will be two types of expenses finalized at the close of escrow: one-time (non-recurring) and recurring (prorated or ongoing).
Non-recurring Closing Costs
Escrow and Settlement Fees. These fees are paid to the title/escrow company for conducting the closing. Additional charges under this category may include document preparation fees, courier fees, signing fees, notary fees, recording fees, and other fees associated with processing the closing.
Lender Fees. These fees include your loan-application fee, credit report fee, loan origination fees, underwriting fees, and processing fees. In some cases, flood certification is also needed to determine whether the property is within a flood zone.
Within three days of receiving your completed loan application, your lender must give you a Loan Estimate, which will include your expected closing costs. These are only an estimate, and many of the fees can change. If they do change, you will receive a revised Loan Estimate so that there are no surprises along the way.
Mortgage Insurance. Private Mortgage Insurance (PMI) is typically required by lenders when a down payment is less than 20% of the home’s purchase price. In this case, you may need to pay the first month’s PMI payment at closing.
Title Insurance. A search of the home’s deed history is conducted by the escrow company to ensure that someone else does not have a claim to the property. Once this is confirmed, there are two types of title insurance policies that may be issued. An Owner’s Policy protects the buyer should someone challenge your ownership of the home in the future. Similarly, a Lender’s Policy protects the lender should an issue of ownership arise.
Recurring or Prorated Closing Costs
Recurring fees are items you can expect to pay throughout homeownership, like homeowners insurance. At closing, funds are generally collected and set aside to pay the first few installments of these ongoing expenses. You may hear terms such as “impounds” or “reserves” when the professionals on your team refer to the collection of these upfront, prorated fees:
Property Taxes. Typically, lenders will want any taxes due within 60 days of purchase by the loan servicer to be paid at closing.
Prepaid Interest. Most lenders will ask you to prepay any interest that will accrue between closing and the date of your first mortgage payment.
Homeowners’ Insurance. This policy covers damages and losses caused by unexpected events like fire and weather damage. Your first year’s insurance is often paid at closing.
Home Warranty. Homeowners’ insurance does not cover general wear and tear. A home warranty will protect your home’s appliances and systems from breakdowns caused by regular use.
Seller Closing Costs
At this point, you may wonder if the seller pays anything in a real estate transaction. As stated previously, all fees are negotiable. Yet, in Contra Costa County, it is customary for a home seller to pay closing costs ranging from 5% to 9% of the sales price:
Real Estate Broker’s Commission. The listing broker charges this fee for marketing the property. The commission is typically split between the seller and the buyer’s brokers.
Seller Concessions. These are any fees the seller agrees to pay on behalf of the buyer, such as prorated property taxes, mortgage discount points, or a home warranty.
County Transfer Tax. A tax is paid when the title passes from seller to buyer. In Contra Costa County the transfer tax is currently $1.10 per $1,000. However, note that some cities in the county have different fee schedules. The City of Richmond, for example, currently charges $7.00 per $1,000. Also, note that while responsibility for this tax is negotiable, it is customary in Contra Costa County that the seller pays the county tax while any city tax is split between the buyer and seller.
Other Closing Costs to Consider
Home Owners Association Document & Transfer Fees. If the home is within an HOA, there may be additional fees, requirements, and procedures during the escrow period; most notably, payment for documents and transfer fees. The large stack of paperwork will show if the dues are paid current or if they are delinquent, what the dues are, and their frequency, and will include copies of all pertinent Association documents.
The Association documents will include CC&Rs, Bylaws, financial statements, minutes, rules, and other relevant notices. It is crucial that buyers review all of these documents to understand the rules of the Association, determine if the Association has enough reserves in place to avert future special assessments, check to see if there are special assessments planned, pending legal action, or any other items that might be of concern.
Can You Avoid Paying Closing Costs?
You can avoid upfront fees on your loan by getting a no-closing cost mortgage. However, when a lender offers a deal like this, it often costs you in the long run. For example, the lender may charge you a higher interest rate on your loan for not paying closing costs upfront. The lender may also wrap the closing fees into the total mortgage owed, in which case you end up paying interest on the closing costs.
Alternatively, buyers can negotiate with the seller over who pays these fees. Often if it is a buyer’s market, the seller will agree to assume some or all of the buyer’s closing fees.
The Bottom Line
Purchasing a home is a big step for many people; figuring out just how much it costs can be tricky. The best way to anticipate how much closing costs to expect is to speak with a reputable mortgage lender to discuss custom housing expense scenarios. If you need recommendations, I’d be happy to provide you with some.