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Closing Costs vs. Down Payments When Buying a House in California

Home buyers in California tend to have a lot of questions about closing costs and down payments. And rightfully so. These upfront expenses can add up to thousands of dollars. So you need to understand what they are and how they work.

Many home buyers are also confused about the relationship between closing costs versus down payments, and how they interact with each other. In this article, we will clear up some of the confusion and misconceptions surrounding these two purchase-related upfront expenses.

Similarities and Differences

When it comes to buying a home in California, there are similarities and differences between closing costs and down payments. The first thing you need to understand is that they are not the same thing. In fact, they aren’t really connected in any way.

Let’s start the similarities.

What closing costs and down payments have in common is the fact that you have to pay them upfront, in order to close the transaction. This means home buyers have to save up enough money to cover both their closing costs and their down payment, in order to qualify for a mortgage loan.

Another similarity is that both the down payment and closing costs have to be paid on or before the final closing day. When you “close” on a home, you finalize and sign all of the documents relating to the property transfer. You will also provide a cashier’s check (or in some cases a wire transfer) to cover your closing costs.

But the similarities end there. Closing costs are basically a collection of fees and charges that can accumulate during the home buying and mortgage process. The down payment, on the other hand, is an upfront investment that goes toward the sale price.

Another way to think of it: your down payment is part of the investment you’re making in the house, while the closing costs are not. This will make a lot more sense if we cover these two expenses in more detail, and individually.

Explanation of Closing Costs

When you buy a house in California, you will receive various services from a number of different people and organizations. For example, you will receive property tax and recording services from local government offices. You will receive mortgage-related services from your lender (if you’re using home loan). You’ll probably also encounter fees relating to credit reports, home appraisals, and other services related to the purchase of your home.

All of these things combined are referred to as your closing costs. Some of these costs come from your mortgage lender, while others come from third parties like those mentioned above.

In California, closing costs can easily add up to thousands of dollars. We talked about the typical costs a home buyer can expect to pay in a separate article. For now, just know that these fees and charges are not related to the down payment in any way.

When you apply for a home loan, the lender will want to ensure that you have the funds needed to cover your closing costs – in addition to the down payment expense. To verify this, they will review your bank statements and other financial records. This is a standard part of the mortgage process.

Explanation of Down Payments

Let’s shift gears now and talk about the down payment you might encounter when buying a home in California. Unlike closing costs, which are basically the cost of doing business in the real estate world, the down payment gets applied toward your purchase. That means the money gets invested into the home, when you finalize the sale.

Most home buyers in California have to make a down payment of some kind. The one exception is for military members who can qualify for the VA loan program. VA loans offer 100% financing, which means eligible borrowers can buy a house with no money down.

For a conventional home loan (one that’s not insured by the government), a typical down payment can range from 3% to 20% depending on the scenario. The FHA loan program, which is popular among first-time buyers in California, allows borrowers to put down as little as 3.5%.

It’s also worth noting here that home buyers can often use gift money from a family member or other approved third-party, to put toward their down payment. So that’s coming to consider if you’re having a hard time saving up for the upfront expenses relating to a home purchase.

A Good Reason to Start Saving Now

If you do the math regarding down payments and closing costs, you’ll see that they can add up to a sizable amount. Because of this, it’s wise to start saving money as soon as possible.

If you believe that you’ll be buying a home in California in the near future, now is the time to start saving. The more money you can save between now and the time you enter the market, the better prepared you will be for your down payment and closing costs expenses. You’ll also have an easier time qualifying for a mortgage loan, if you do in fact need financing.

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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