“Closing Costs are defined as the expenses buyers and sellers normally incur in the transfer of home ownership over and above the cost of the home.”
In San Diego, the buyer and seller negotiate the allocation of the closing costs in the Residential Purchase Agreement / Purchase Contract. It is important to note that who pays what cost in a home sale / purchase is always negotiable. For the purpose of this discussion we are going to focus on the costs normally incurred by the buyer here in San Diego County in 2022.
How Much Can a Buyer Expect to Pay for Closing Costs
San Diego Closing cost for home buyers generally fall between 2 to 4 percent of the purchase price of the home and can vary greatly depending on the pro-ration of property taxes, pre-paid insurance, escrow fees, title fees, and lender origination fees.
The typical closing costs to purchase a $500,000 San Diego home could run anywhere from approximately $10,000 to $15,000 or more. These funds typically cannot be borrowed because that could raise the buyer’s debt to income ratios to a point where the buyer may no longer qualify for a loan.
What About Those Zero Closing Costs Advertisements
Remember nothing in life is free, however, your lender may be able to pay some or all your closing costs for you by charging you a higher interest rate. Keep in mind you are in fact paying the closing costs by taking a higher interest rate and a higher monthly mortgage payment for the life of your home loan! *It is important to discuss the pros and cons of this strategy with a lender, or licensed mortgage loan originator (MLO) that you trust!
Some Realtors® and Brokerages will offer closing costs incentives that pay a large portion of your closing cost for you as well.
What are the Buyer’s Closing Costs Exactly
Buyers closing cost are broken down into two separate categories. Recurring and Non-recurring closing costs.
Buyer’s Non-Recurring Closing Costs
Non-recurring closing costs are fees that are paid once for the initial home purchase and never paid again. These fees are one-time charges for items such as:
Courier / Delivery
Home Inspection Fee
Wood Destroying Pest Inspection Fee
Loan Origination Fee
Property Transfer Tax
Buyer’s Recurring Closings Costs
Recurring closing costs that you will pay annually throughout the life of your home loan and as long as you own your home. These fees are often paid in advance of closing for prepaid premiums and establishing impound/escrow accounts. They include such fees as:
Hazard / Homeowner’s Insurance
Flood Insurance (If required)
Prepaid Home Loan Interest
Private Mortgage Insurance Premium
The time of the year that you close will dictate how much pre-paid taxes, insurance, and premiums your lender will collect and hold in an impound account for you. Not all loans require an impound or escrow account, but typically loans with smaller down payments of less than 80% of your purchase price will demand an impound/escrow account.
Seller & Realtor® Credits
As we discussed earlier who pays what fees and closing cost are always negotiable. Sometimes sellers will offer a closing cost credit in lieu of making repairs discovered from the buyer’s home inspection.
In addition, your Realtor® may offer a credit towards your closing cost as an incentive to work with them.
It is vitally important to obtain your lender’s approval for any and all closing cost credits. Most lenders will limit the total credits a buyer can receive to 4 percent of the total purchase price. Imagine the disappointment with negotiating a $50,000 closing cost credit from the seller and having the lender only approving $20,000. It is important to ensure your Realtor® and lender are working closely together and communicating effectively so this does not happen during your home purchase!
Watch Out for the Garbage / Junk Fees
“Garbage fees,” also known as “junk fees,” can be tacked onto some mortgages by lenders or added into your home purchase by a real estate agent who knows many buyers wont pay close attention. There is no way to completely avoid all of them, but you can often minimize them by carefully analyzing your Closing Disclosure and Settlement Statement.
Look out for excessive processing and documentation fees in the following five categories:
• Interest rate buy down fee
• Application fee
• Underwriting fee
• Loan processing fee
• Mortgage rate lock fee
Look out for these three Junk / Garbage fees sometimes added by real estate agents:
• Transaction fee
• Service fee
• Transaction Coordinator fee
Sometimes real estate agents will add these 3 fees to your home purchase and then “Discount” them half off for “Friends and Family”. At Homeport Residential we treat every client like family and we will never charge a Junk or Garbage fee! In fact we give all our clients cash back at closing.
If any of the above fees seems to be unusually high, or out of place, ask about them, as they can often be negotiated. This advice applies to other fees as well. If it looks funny, ask about it. Often, the mere act of questioning the fee will result in the fee being lowered or eliminated. Remember the answer is always no, if you don’t ask the question.
I hope this answered all your questions on buyer’s and seller’s closing costs here in San Diego. Feel free to reach out anytime if you want a free closing costs estimate, or if you have any other closing costs or San Diego real estate related quesitons.