Determining the minimum required down payment is quite straightforward--usually, it is a percentage of the selling price determined by the type of loan program. For instance, the minimum down payment is 3% for conventional loans, 3.5% for FHA loans, and zero for USDA and VA loans.
It can be challenging to determine the amount a buyer needs to cover for closing costs, as these expenses typically vary between 2% and potentially exceeding 5% of the sales price.
Under certain circumstances, it is possible for the seller or lender to cover a portion or all of these fees on your behalf. However, it is important to note that if the seller covers the buyer's fees through a closing cost credit, it could impact your offer and bargaining power in a competitive seller's market (where sellers hold more negotiating power due to high demand). Additionally, if a lender covers some or all of your closing costs, your interest rate and monthly payment are likely to increase.
More on closing costs
The closing costs encompass various fees necessary for initiating and finalizing a new home acquisition in conjunction with a mortgage. Typically, they can vary between 2% and 5% of the home's selling price for a purchase and between 2% and 4% for a refinancing loan. The size of the home's selling price will influence where within this percentage range the closing costs fall, with higher-priced homes tending towards the lower end of the 2% to 5% spectrum. In the case of a refinancing loan, closing costs are generally lower as many expenses related to a sale do not apply to a refinancing transaction.
Closing fees encompass all charges levied by your lender, home appraiser, escrow company, title company, home insurance provider, and other third parties engaged in the mortgage and sale aspects of the transaction.
The settlement agent, which in California is an Escrow company, will gather the closing cost fees and allocate them to the appropriate parties during the closing process. Certain fees such as appraisal, inspection fees, and sometimes home insurance premiums are paid in advance by the buyer before closing. These prepayments are noted as paid outside closing (POC) items and are accounted for on the closing statement.
Closing costs may vary depending on the region and the service providers involved. In Northern California, major title and escrow companies are usually combined and their charges are generally similar. On the other hand, in Southern California, escrow providers are independent companies that collaborate with title companies for certain services. Through my experience over the years, I have observed that an independent escrow company offering closing services, not affiliated with a title company, tends to have significantly higher fees, sometimes amounting to thousands of dollars more. Consequently, transactions in Southern California are likely to incur higher title/escrow closing costs.
Below are the typical closing costs you should expect with a purchase transaction.
Lender fees
The costs can vary significantly depending on the lender selected and whether points are being paid to secure a reduced rate. Below are some common lender charges:
Loan origination fee
Loan garbage fees like processing, underwriting, administrative fees, etc. Quick tip--the bigger lenders --especially online lenders and many banks --charge these fees--and have a tendency to "hide" them during verbal conversations quoting rates and points--for example they quote a rate and "zero" points (each point is 1% of the loan amount) but fail to mention these garbage fees, leading one to believe they are cheaper than a lender who quotes "all lender" fees. Once you apply and a loan estimate is provided, these garbage fees will be listed under the origination section of the loan estimate page 2 box A. These garbage fees can be in the thousands of dollars.
Appraisal fee--this will vary based on the transaction, property type, property location and loan type. In rural areas of Northern California --for a conventional loan -- you can expect something around $675 since fewer appraisers service these areas and often an appraiser will travel greater distances to visit the property. In urban areas appraisal fees will often be less. Quick tip -- On conventional loans that meet certain criteria an appraisal may not be needed, thus saving this fee.
Lenders will also pass on some other fees to a buyer, like credit report fees, tax service, flood cert, a MERS fee, among others. These fees usually amount to less than $200 combined and a lender is not allowed to "mark up" these fees to more than what they actually cost the lender.
Government loans have additional fees that are typically financed into the loan. Keep in mind government loan rates are typically much better than conventional so having to pay or finance these fees may not be a deal breaker. An experienced loan officer can compare various loan program benefits for you based on your unique scenario.
Example of these financed fees:
FHA upfront mortgage insurance premium -1.75% of the loan amount and monthly mortgage insurance depending on the loan to value and term
USDA has a 1% Guarantee fee added to the loan as well as a monthly fee --currently .35% of the loan balance
VA funding fee will range from 1.25% to as much as 3.3% of the loan amount -depending on previous usage and if there is a down payment --added to the loan-- unless the veteran is exempt from paying the funding fee
Title and Escrow company fees
The amount of these fees will vary based on factors such as the sales price, loan amount, terms of the sales contract (including responsibilities for payments), property location, and the customary practices for buyer and seller payments in the area. Generally, a buyer can expect to pay between $3,000 and $5,000 or possibly more for these services. A knowledgeable lender will be able to provide a more precise estimate within this range upon reviewing a signed sales contract and being informed of the title/escrow company selected by both parties.
Home insurance
As a buyer, you have the freedom to select your insurance company. The initial annual premium can be paid by you directly or handled by the escrow/title company during the closing process. The cost of home insurance is influenced by factors such as the property's location, size, amenities, and the buyer's insurance claims history. In areas like the Northern California foothills, premiums can vary widely, ranging from $2,000 to over $7,000 per year. Buyers in these regions may need to resort to the California Fair Plan, a high-risk insurance option provided by the state as a last resort. For more details, reach out to your preferred insurance agent or visit the following link: https://www.cfpnet.com/
Impound account setup
Some loan programs, such as FHA and USDA, or conventional loans with less than 5% down payment, require mandatory impound escrow accounts. In these accounts, the lender collects reserves and includes 1/12 of the annual property taxes and home insurance in each monthly payment. The amount of reserves needed depends on the timing of the transaction, the sales price, and the annual home insurance premium. A rough estimate would be 6 months of taxes and 3 months of the annual home insurance premium. For example, on a property with a $500k sales price and a $3500 annual home insurance premium, setting up this reserve account would typically require around $4k. With conventional loans having at least 5% down payment or a VA loan, impound accounts are usually optional, subject to the lender's policy. If no impound account is in place, the buyer is responsible for paying all property tax bills and the home insurance renewal premium directly, resulting in a lower monthly payment as these costs are not collected by the lender.
Prorated property taxes
If a transaction closes at a certain time, the seller might have already paid the property taxes or they will be paid on the seller's behalf during closing. In such cases, as the buyer, you would incur a charge known as proration for these prepaid taxes, calculated based on the number of days the seller has already paid. Generally, the higher the prorated tax amount you are charged, the lower the property taxes collected in the impound account reserve.
Other transaction fees
Fees for buyer paid inspections like home inspection, septic or well, or pest inspections may be charged depending on the transaction and the buyer's wishes. If the property is within a HOA there will typically be HOA transfer fees and possibly a proration of previously seller paid HOA fees.
There may be additional fees charged to the buyer not included above, however these are the most typical.