Couple confidently reviewing their California closing cost guide.

California Cash to Close: A Homebuyer's Cost Guide

Q: How is a down payment different from closing costs?

A lender's seasoning period is a mandatory waiting time after you purchase or refinance a property before you can access the full after-repair value (ARV) for a cash-out refinance. Most DSCR lenders require a seasoning period of 6 to 12 months. Refinancing before the seasoning period concludes typically means the lender will base the loan amount on your original purchase price plus rehab costs, which severely limits the amount of equity you can cash out. Waiting until after the period allows you to borrow against the full market value you created through your renovations.

Q: What is the estimated budget for closing costs in California?

To justify a higher appraised value, you should provide the appraiser with a detailed and organized renovation packet. This packet removes guesswork and provides concrete evidence of the work performed. It should include: a cover letter summarizing the major upgrades, a detailed scope of work document itemizing all improvements, compelling before-and-after photos showing the property's transformation, copies of paid invoices and receipts for materials and labor, and copies of any official building permits that were issued for the work.

Q: Can closing costs be financed as part of the mortgage?

No, LTV limits for cash-out refinances vary significantly among different DSCR lenders, as each has its own guidelines and risk tolerance. While purchase loans may reach 80% LTV, cash-out refinances are often capped at 70% or 75% LTV. The specific LTV offered to an investor is influenced by several factors, including: Credit Score (higher scores typically qualify for higher LTVs), DSCR Ratio (a stronger income-to-debt ratio may result in a better LTV offer), Property Type (a single-family home might receive a higher LTV than a multi-unit property), and Loan Amount (some lenders may offer different terms based on the size of the loan).

Q: What are the main categories of fees included in closing costs?

Your property's monthly rental income is the foundation of a DSCR loan approval. The formula is: DSCR = Gross Rental Income / Total Monthly Housing Payment. A higher rent results in a higher DSCR. This proves to the lender that the property can comfortably support a larger loan payment, which in turn allows you to qualify for a larger loan amount and maximize your cash-out.

Q: What are some effective ways to reduce the amount of cash needed at closing?

Yes, it is often possible to pay for closing costs with the proceeds from your new loan, meaning you don't need to bring cash to closing. However, these costs are not added on top of your loan limit. Instead, the closing costs are subtracted from the total cash-out funds available to you after your existing mortgage is paid off. The total loan amount, including these costs, cannot exceed the lender's maximum LTV limit based on the property's appraised value.

Q: Can a home seller contribute to a buyer's closing costs?

Investors can make several avoidable errors that reduce their available cash-out funds. The most common mistakes include: Poor Documentation (failing to provide an appraiser with a thorough renovation packet can lead to a conservative and lower valuation), Refinancing Too Soon (not waiting for the lender's seasoning period to expire is a costly mistake that forces the loan to be based on cost rather than value), Lacking a Tenant (attempting to refinance a vacant property is less favorable, as lenders prefer the security of a signed lease over estimated market rents), and Ignoring Lender Differences (accepting the first loan offer without comparing options can mean missing out on better LTV limits or shorter seasoning requirements from other lenders).

Q: Why might my final closing cost amount be different from the first estimate I received?

The ideal time to begin the refinance process is 30 to 45 days before your lender's seasoning period expires. This allows you to gather all necessary documentation, secure an appraisal, and complete underwriting so that you can close immediately once the seasoning requirement is met. Crucially, by this time, the property should also be 'stabilized,' which means you have a qualified tenant in place with a signed lease and have collected at least the first month's rent.

Specialized In Jumbo Loans, Investor Loans, DSCR Loans, Non-QM Financing, Commercial Mortgages, and Tax-Informed Lending Strategies

Published By

David Ghazaryan

Owner / Broker / Banker

Contact Me At

(702) 766-3744

NMLS 1486726

Let's Connect

TL;DR

Understanding your total cash-to-close is essential for a smooth home purchase in California. This summary covers the key distinctions and strategies discussed in the article:

Down Payment vs. Closing Costs: Your down payment is your initial equity in the home, reducing your loan principal. Closing costs are separate fees paid to lenders, title companies, and other parties to finalize the transaction.
Budgeting for Costs: As a general guideline, you should plan for closing costs to be between 2% and 5% of the home's purchase price in California, in addition to your down payment.
Key Fee Categories: To avoid surprises, it's important to understand the different types of charges you'll encounter. These include one-time lender and title fees, as well as pre-paid expenses like property taxes and homeowners insurance that are paid in advance at closing.

What is the difference between a down payment and closing costs?

Many first-time homebuyers in California mistakenly believe the down payment is the only cash they need to buy a home. The reality is that your down payment and your closing costs are two separate and significant expenses. Understanding the distinction is the first step to a smooth home purchase.

Down Payment: This is a portion of the home's purchase price that you pay upfront. It represents your initial ownership stake, or equity, in the property. The amount varies based on your loan type and financial situation, typically ranging from 3% to 20% or more. For example, on an $800,000 home in Los Angeles, a 10% down payment would be $80,000. This money goes directly toward the principal of your loan, reducing the total amount you need to borrow.
Closing Costs: These are the fees you pay to the various parties involved in the real estate transaction to finalize, or 'close', the deal. This includes your lender, the title company, the escrow company, government agencies, and other third parties. These fees do not reduce your loan balance; they are purely the cost of doing business. The total of your down payment and all your closing costs combined is your final cash-to-close amount.

How much should I budget for closing costs as a percentage of the price?

As a general rule, homebuyers in California should budget between 2% and 5% of the home's purchase price for closing costs. (The data, information, or policy mentioned here may vary over time.) The exact percentage can fluctuate based on the home's price, your location, the lender you choose, and the time of month you close.

Let's look at a realistic example for a home in San Diego:

Purchase Price: $900,000
Estimated Closing Costs (at 3%): $27,000
Down Payment (at 10%): $90,000
Estimated Total Cash-to-Close: $117,000 ($90,000 + $27,000)

As you can see, the closing costs represent a substantial amount of money on top of the down payment. In high-cost areas like Los Angeles or San Francisco, where home prices are well over a million dollars, this 2-5% can easily add $20,000 to $50,000 or more to your upfront expenses. It's crucial to get a detailed Loan Estimate from your lender early in the process to see a personalized breakdown of these potential costs.

Illustration of closing cost documents and a calculator.

Can my closing costs be rolled into the mortgage loan?

This is a common question, but the answer is nuanced. Generally, you cannot simply add closing costs to your loan amount and finance them in the traditional sense, as this would change the loan-to-value (LTV) ratio. However, there are a few strategies that achieve a similar outcome:

Lender Credits: This is the most common method. You can opt for a slightly higher interest rate on your mortgage in exchange for a 'credit' from the lender that covers some or all of your closing costs. You pay less cash upfront, but your monthly mortgage payment will be higher for the life of the loan. It's a trade-off between upfront cash and long-term cost.
Seller Concessions: You can negotiate with the seller to have them pay for a portion of your closing costs. The seller agrees to contribute a certain percentage of the sales price toward your fees. This is often written into the purchase agreement. We'll cover this in more detail later.
Specific Loan Programs: Some government-backed loans, like the VA loan, have rules that allow certain closing costs to be financed into the loan amount without impacting the LTV in the same way a conventional loan would. This is not available for all loan types. (The data, information, or policy mentioned here may vary over time.)

It's important to discuss these options with your mortgage advisor to see if they make financial sense for your situation. While reducing your cash-to-close is appealing, it's essential to understand the long-term impact on your monthly payment and total interest paid.

What are non-recurring vs. pre-paid closing costs?

Closing costs are not one single fee. They are a collection of different charges that can be categorized into two main types: non-recurring costs (one-time fees) and pre-paid items (recurring homeowner expenses paid in advance).

H3: Non-Recurring Closing Costs

These are the one-time service fees you pay to complete the mortgage and title transfer. Once you pay them at closing, you won't pay them again.

Lender Fees:
- Origination Fee: A charge from the lender for processing and underwriting your loan, often around 0.5% to 1% of the loan amount. (The data, information, or policy mentioned here may vary over time.)
- Discount Points: An optional fee paid to 'buy down' your interest rate.
- Appraisal Fee: Pays a licensed appraiser to verify the home's market value.
- Credit Report Fee: The cost for the lender to pull your credit history.
Title and Escrow Fees:
- Title Search & Insurance: Fees for searching public records to ensure there are no liens or claims on the property, plus an insurance policy to protect you and the lender from future claims.
- Escrow Fee: Paid to the neutral third-party escrow company that handles the funds and documents during the transaction.
Government Fees:
- Recording Fee: Paid to the county (e.g., Los Angeles County or San Diego County) to officially record the sale and transfer of the property deed.
- Transfer Taxes: A state or local tax on the transfer of real property.

H3: Pre-Paid Closing Costs

These are not fees for services but rather your own homeowner expenses that you must pay in advance at closing. Your lender requires this to ensure your property is protected and taxes are paid on time.

Homeowners Insurance: You will typically be required to pay for the first full year's insurance premium at closing.
Property Taxes: You'll need to prepay a few months of property taxes, which are then placed into an escrow account. The exact number of months depends on the time of year you close and when the next tax bill is due.
Prepaid Mortgage Interest: This covers the interest on your loan from the date of closing to the end of that month. Closing at the end of the month reduces this specific cost, while closing at the beginning of the month increases it.

Homebuyers reviewing their loan estimate paperwork.

How can I reduce my total cash-to-close requirement?

While some costs are fixed, there are several effective strategies to lower your final cash-to-close number:

Shop for Lenders: Not all lenders charge the same origination and administrative fees. Compare Loan Estimates from at least three different lenders to see who offers the most competitive fee structure.
Negotiate Seller Concessions: In a balanced or buyer's market, you can often negotiate for the seller to contribute to your closing costs. This is a powerful tool, but its success depends on market conditions.
Close at the End of the Month: As mentioned, closing on the last few days of the month significantly reduces the amount of prepaid mortgage interest you owe at the table.
Explore Assistance Programs: Look into state and local first-time homebuyer programs. Organizations like the California Housing Finance Agency (CalHFA) offer grants and subordinate loans that can be used to cover down payment and closing costs.
Review Your Fees: Carefully read your Loan Estimate and question any fees that seem unclear or excessive. Sometimes, 'junk fees' with vague names can be negotiated or removed.

What specific closing costs are highest in California?

Due to high property values and specific local practices, a few closing costs tend to be more substantial in California than in other states.

Escrow and Title Fees: In California, transactions are typically handled by neutral escrow companies. The fees for both escrow services and title insurance are often based on the home's purchase price. For an expensive home in San Francisco, these combined fees can easily run into several thousand dollars, making them one of the largest non-recurring costs.
Property Taxes: California's property taxes, governed by Proposition 13, are calculated as 1% of the home's assessed value plus any local assessments. When you close, you must prepay several months of these taxes to fund your escrow account. On a high-value home, this initial deposit can be a significant portion of your cash-to-close.
Lender Origination Fees: While the percentage (e.g., 1%) might be standard nationwide, the dollar amount is much larger in California simply because the loan amounts are higher. A 1% origination fee on a $750,000 loan in Los Angeles is $7,500, a significant sum.

Does the seller ever pay for the buyer's closing costs?

Yes, this is quite common through a mechanism called seller concessions or seller contributions. As part of the negotiation process, a buyer can ask the seller to pay for a specified amount or percentage of the buyer's closing costs.

Here's how it works: The contribution is written into the purchase contract. For example, you might offer the full asking price for a home on the condition that the seller contributes 3% towards your closing costs. This amount is then deducted from the seller's proceeds at closing and applied directly to your fees.

It's important to know there are limits to how much a seller can contribute, which are set by the type of mortgage you have:

Conventional Loans: Up to 3% of the sales price if your down payment is less than 10%. Up to 6% if your down payment is between 10% and 25%. Up to 9% if your down payment is 25% or more.
FHA Loans: Up to 6% of the sales price.
VA Loans: The seller can pay for all of the veteran's reasonable and customary closing costs, plus up to 4% of the loan amount in additional concessions. (The data, information, or policy mentioned here may vary over time.)

Seller concessions are a fantastic way to reduce your cash-to-close, but their availability depends heavily on local market dynamics. In a competitive seller's market, it can be much harder to negotiate them successfully.

Why is my final cash-to-close number different from the first estimate?

It's a common source of anxiety for homebuyers when the final number is different from the initial one. This discrepancy usually comes down to the difference between two key documents: the Loan Estimate (LE) and the Closing Disclosure (CD).

The Loan Estimate (LE): You receive this document within three business days of applying for a mortgage. It is your lender's best estimate of your closing costs and loan terms based on the information available at that time. Some figures, like third-party services you can shop for (e.g., title insurance), can change.
The Closing Disclosure (CD): You must receive this document at least three business days before your scheduled closing date. The CD is the final, itemized statement of all your loan terms and closing costs. By law, most figures on the CD cannot be significantly different from what was quoted on the LE.

There are three categories of costs, and their ability to change from the LE to the CD varies:

Zero Tolerance: Fees like the lender's origination charge and transfer taxes cannot increase at all.
10% Cumulative Tolerance: Fees for third-party services that the lender requires and for which you can't shop (like the appraisal or credit report fee) can't increase by more than 10% cumulatively.
Unlimited Tolerance: Costs for services you can shop for (like title insurance or pest inspection), prepaid interest, and initial escrow deposits can change without limit, as the lender doesn't control these choices or variables. (The data, information, or policy mentioned here may vary over time.)

If you see a major difference, ask your lender for a clear explanation immediately. It could be due to a changed circumstance, like a change in your loan amount or locking in your interest rate, but you have the right to understand every single dollar you are being asked to bring to the table. Feeling more prepared for closing day? Understanding your cash-to-close is the first step. To get a detailed, no-surprise breakdown for your specific situation and navigate California’s unique market with an expert, you can Apply now and start your homeownership journey with confidence.

Ready for a clear, no-surprise breakdown of your potential mortgage costs? Apply now to get personalized numbers from a California market expert.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.