Want to learn how to lower California escrow closing costs? Read about several ways to lower closing costs in California.
Homebuyers Don’t Understand Closing Documents
In September 2021 the Qualia Homebuyer Sentiment Index issued a report about buyers not understanding closing documents. Real Trends, a real estate news site, claimed: “Despite the requirement of closing disclosures (CDs) to inform homebuyers of their transaction costs, consumers still don’t understand the costs associated with buying a home.”
The Qualia report disclosed:
- Only 20% of homebuyers nationally claimed to understand the closing documents they signed;
- This low percentage resulted in the risks home purchasers take by acting too quickly signing closing documents they don’t understand;
- These include misunderstanding transaction costs and the home buying process; and
- 23% of homebuyers bought their home “sight unseen” in the current “competitive market”.
Too Many Homebuyers Pay More Than Expected
Similar to “sticker shock” at a new car dealership, homebuyers are surprised at the high prices nationwide.
The Qualia survey also revealed:
- The current nationwide low-interest rates and limited housing inventory created a competitive housing market;
- 30% of buyers paid more than expected for their homes;
- Of those paying more, 32% paid $50,000 or more than the asking price;
- 23% bought their home without seeing it in person; and
- 19% removed home inspections contingencies from their purchase contract to sweeten their offers.
Additionally, 44% of recent homebuyers experienced higher transaction costs at the closing than they expected.
Homebuyers Experience Extra Stress
In addition, the survey also found:
- Recent homebuyers experienced “stressful, complicated closings”;
- The closing documents were too complicated; and
- The only thing more stressful than the closing was the moving-in process.
The Solution for the Stress?
This survey also revealed 55% of future homebuyers prefer to receive explanations of the closing costs and process face-to-face before the closing date. While 44% preferred to receive these explanations over a secured web-based portal or a mobile app.
This survey emphasized the need for better education of the home buying and selling process transparency. According to Nate Baker, CEO of Qualia: “Technology needs to simplify the complex process allowing real estate professionals to focus on consumer education during the home buying process.”
SoCal Lifestyle Realty Educates Buyers and Sellers About California Closing Costs
Recently, our blog published a post titled: “How To Understand California Escrow Costs 2021”.
Our post explains:
- The terms used by escrow officers (or title companies);
- Types of costs related to the closing of escrow;
- Estimated fees for each item that the seller and buyer pay at the closing; and
- Examples of California escrow costs.
Besides Better Education, Lowering Your Closing Costs Will Help Relief Stress
Bigger Pockets reveals some of the ways to lower your closing costs like:
- Your loan (mortgage) interest rates and monthly payments;
- Lender fees;
- Seller’s contributions to closing costs;
- Adding closing costs to your mortgage payments;
- Research vendors; and
- Seek financial aid
Let’s explore these in greater detail.
Lenders charge fees for the same services, but not all lenders charge the same fee. One way to get ahead of these fees is to get a “pre-approval loan” letter directly from a lender or a mortgage company. This letter shows sellers that you can buy their home which gives you an edge over offers from other buyers.
To get a pre-approval loan letter, you must contact lenders to see which ones will pre-qualify you for a mortgage loan. Upon approval, ask for a list of estimated fees and costs. Before agreeing to the pre-approval compare the same costs and fees with other lenders. You will see a difference between lenders.
Comparing lender fees and costs may save you lots of money.
Learn more about a “pre-approval loan” letter in our recent post titled: “Is It Hard To Get Pre-Approved For A Mortgage “.
Before signing a Purchase & Sale Agreement prepared by the seller of the home you want to buy read it carefully. It should include items at the closing the seller agrees to pay.
Buyers typically pay their attorney’s fee, loan-application fee, credit report fee, and others. You should know what items the seller must pay like the real estate broker commissions.
Confer with your experienced Realtor at SoCal Lifestyle Realty about the common items sellers pay at the closing. Are they reasonable and fair? You have the right to negotiate with the seller about what you pay as the buyer and what the seller pays.
Add Closing Costs to Your Mortgage Payments
Some lenders allow folding closing costs into your mortgage so you avoid or lower the upfront closing costs. If your lender agrees, the closing costs get paid by the lender and you pay them as added to your purchase price. Of course, you will pay the interest rate over the time you pay off the closing costs.
Lenders hire outside professionals to perform pre-closing services like an appraisal, home inspection, and termite inspection. Lenders usually maintain a list of different vendors who charge different fees.
If you feel that a proposed inspection fee is too high you can ask your lender who else they have on their list. You contact each one to see which one is cheaper and ask your lender to use that one.
Seek Financial Aid
The federal government and the State of California have their own financial assistance programs for first-time homebuyers and other buyers who qualify.
Learn all about these money-saving programs at our recent blog post about “First-Time Homebuyer Programs”. It explains the federal, State of California, and San Diego financial aid programs for first-time (and other qualified) homebuyers.
Lower Closing Costs By Asking Questions
Typical closing costs that buyers pay are not always set in stone. Let’s examine them.
Application Fee – Before you apply for a mortgage, ask your lender about the application fee. Some application fees are negotiable. Shopping around to discover different lender’s fees may save you money. Also, it gives you leverage to know what a lender’s competitors charge.
Appraisal Fee – Like other vendors, your lender probably uses different appraisers who may charge differently.
Association Dues – Every condo or homeowner’s association charges membership dues. The annual association dues get paid at closing. Yet, buying during the year means a prorated amount. Your seller already paid the annual dues and will seek reimbursement for the prorated amount. This gives you room to negotiate how much you will reimburse.
Credit Report Fee – Mortgage lenders always get a credit report showing your credit history and credit score. Ask your lender if you must pay this fee as credit bureaus often do not charge the lender.
Discount Points – This is what you pay your lender at closing for getting a lower mortgage rate. One discount point equals 1% of your mortgage amount for lowering your interest rate by .25%. For instance, if you pay your lender $2,000 on a $200,000 mortgage loan, your 4% interest rate lowers to 3.75%.
Tip: Talk with your lender about your options regarding discount points. Paying more upfront doesn’t work for buyers planning to refinance or not living in the home long-term.
Mortgage Broker Fee – Hiring a mortgage broker to find a suitable mortgage may save you money. Yet, know that your broker charges a commission ranging from 0.5% to 2.75% of the loan amount. If you find a direct lender you could save money.
Origination Fee – Most lenders charge 1% as a loan origination fee to process your mortgage application. However, not all lenders charge this fee so shopping or a lender who doesn’t charge this fee saves you money.
Private Mortgage Insurance (PMI) – If your down payment is less than 20% of the loan amount, lenders require you to carry private mortgage insurance which covers you if you miss mortgage payments. Lenders charge varying PMI percentages ranging from 0.5% to 2.3% of the loan amount. You pay your PMI premiums in four ways:
- Lender Paid – Your mortgage lender covers the PMI cost in exchange for raising the interest rate. You save money at the closing but pay more over the years.
- Monthly – You don’t pay the PMI at closing, instead, you pay more for it in your monthly payments.
- Split – You pay part of the PMI at closing and your lender adds the PMI balance to your monthly payments.
- Upfront – You pay the entire amount at closing.
How To Lower California Escrow Closing Costs – Conclusion
Our post explains several ways how to lower California escrow closing costs. In a nutshell:
- Educate yourself about all the California escrow closing costs;
- Learn how to cut lender’s fee;
- How to negotiate higher sellers’ closing cost contributions;
- Adding closing costs to your monthly mortgage payments;
- Research closing services vendors fees;
- Seeking government financial aid; and
- Questioning closing costs to get reduced fees.
Thinking of Buying a Home in San Diego?
SoCal Lifestyle Realty provides experienced Realtors in the greater San Diego area to help you lower escrow closing costs after we find your ideal new home.
Contact us now to learn about available homes in San Diego County.
Steven Rich, MBA – Guest Blogger