Who usually pays for title insurance in California?

Author: Staff

Purchasing real property is a major investment, not only of money but also of risk. Even if a California real estate investor has enough cash on hand to pay the full price without a mortgage loan, they are still bound by property taxes, land use restrictions, and market forces. Most purchasers of real estate already know about these risks, though. A lesser-known risk involves defects, omissions, or fraud in the property’s title. This can lead to problems that are difficult to foresee, such as claims to the property by a former owner’s previously unknown heir, or difficulty in establishing ownership because of a defective deed. Title insurance covers many of these potential issues. Lenders often require borrowers to obtain title insurance policies in order to protect their investments. California’s laws and practices regarding title insurance can be rather difficult to understand at first.

What Is Title Insurance?

Title insurance protects property owners and lenders against unforeseen losses caused by title defects in the property’s history. These might include errors or omissions in a deed, forgery of documents, unresolved liens, or missing or unknown heirs. If, for example, a previous owner of the property forged a spouse’s signature on a deed, that spouse could claim a continued interest in the property. If a property was transferred as part of a probate proceeding, an heir who was left out of the process could make a claim. The current owner of the property could be caught entirely unaware of any problem with the property. Even if the claim lacks any legal merit, they would still have to incur expenses to defend against a claim. Title insurance covers owners and lenders in situations like these.

California has two types of title insurance policies. The California Land Title Association (CLTA) policy covers property owners against potential losses. The policy promulgated by the American Land Title Association (ALTA) offers extended coverage to lenders, who have an interest in the property by virtue of a lien securing the mortgage loan. Both policies involve a one-time payment of a premium, usually at the closing of the sale. The CTLA policy covers the period of time during which the buyer owns the property, while the ATLA policy applies to the period of time from closing until the loan is paid off.

When Do I Need Title Insurance?

Lenders will almost always require title insurance on real estate purchases as a condition of issuing a loan. If an investor is paying cash for a property, they should still seriously consider obtaining a policy.

How Much Does Title Insurance Cost?

While some states set standard title insurance rates by statute, rates may vary from one insurer to another in California. This often depends at least partly on the services provided by the title company. In Southern California, some title companies provide escrow and closing services in addition to issuing title insurance policies, while others only issue policies. Some title companies may offer discounts in various circumstances. Comparison shopping is a good idea for real estate investors.

Who Pays for Title Insurance?

The ultimate choice of title company usually belongs to the party paying for the policy. Local practices may dictate who pays the premiums. In Southern California, the seller typically pays the premiums for both the owner’s and the lender’s policies, but the parties can negotiate different arrangements. If the buyer is paying all or part of the premium, federal law prohibits the seller from requiring them to use any particular title company.

More Blog Posts:

When San Diego Real Estate Investments and Land Use Regulations Collide, Titles and Deeds, April 20, 2018

What is Necessary for a Title Review for a Commercial Real Estate Transaction? Titles and Deeds, January 7, 2018

Financing a Real Estate Development in California, Titles and Deeds, October 30, 2017

It’s one of the most common questions among home buyers and sellers in California: Who pays which closing costs? And it’s an important question, because we’re talking about thousands of dollars in a typical real estate transaction.

The short answer is that it varies. There is no state or county law that dictates who pays which closing costs in California, between the home buyer and seller. It usually comes down to two things — local customs and negotiations.

Even so, there are certain closing costs that are usually paid by the buyer, and some that are typically paid by the seller. There are also some key differences between Southern and Northern California, in terms of who pays what. So let’s explore!

Who Pays Which Closing Costs in California?

Let’s start with a basic definition of “closing costs,” just so we’re on the same page.

Here, we are talking about the various fees and charges that home buyers and sellers have to pay, when finalizing or “closing” a real estate deal. Most of these costs fall onto the buyer, especially when a mortgage loan is being used. But sellers have some out-of-pocket expenses of their own. There are many people involved in the sale and transfer of property, and they all charge for their services.

So, who pays which closing costs in California? Here’s a simplified answer to that question:

• Buyers usually pays most or all of the mortgage-related fees, such as the origination fee, along with escrow charges that are paid to the escrow company.
• Sellers, on the other hand, usually pay the real estate transfer taxes associated with the sale.

Once you get beyond these basic customs, however, it tends to vary quite a bit.

For example, the owner’s title insurance fee might be paid by the seller or the buyer, depending on local customs. In Northern California, it’s more common for the buyer to pay the title insurance fees. While in Southern California, the seller usually covers it. And in some counties, it’s more common for the two parties to split this particular charge. There are no hard-and-fast rules that cover the entire state.

There’s another important caveat to all of this. Negotiations.

The whole concept of who pays which closing costs is almost entirely negotiable. While the state of California does have certain rules regarding mortgage and home-buying fees, they do not dictate who pays which closing costs. That is generally left up to the buyer and seller, via negotiations. And in most cases, all of this will be spelled out within the purchase agreement.

Related article: How long is the closing process?

Understanding Seller Contributions and ‘Concessions’

Seller contributions or “concessions” are another important piece of this puzzle. Within the context of a real estate transaction, a seller concession occurs when the person selling the home contributes money toward the buyer’s closing costs. They concede something, hence the term “concession.”

You might wonder why a seller would do such a thing. It comes to good old-fashioned marketing. In a slow real estate market, where homes take longer to sell, homeowners sometimes offer concessions as a way of enticing buyers and offers.

The opposite is true as well. In a competitive, fast-moving market, sellers are generally less likely to pay a portion of the buyer’s closing costs. That’s just a universal truth of the real estate world, in California and elsewhere across the country.

So there’s a negotiating side to this, as well. Local customs partly determine who pays which closing costs in California, between the buyer and seller. But local market conditions also play a role.

Most of the mortgage loan programs available today allow for seller contributions or concessions. In such cases, the two parties involved can negotiate over who will be paying what. This is true for FHA, VA, and conventional or “regular” mortgage loans. They all offer some degree of flexibility.

Knowing What to Expect on Closing ‘Day’

In California, home buyers and seller can close separately. They can also do it remotely, through a digital process that reduces or eliminates the need for face-to-face interaction (important during COVID).

As a home buyer, you shouldn’t encounter any surprises as to who is going to pay which closing costs. California mortgage borrowers typically receive a document a few days before closing that shows all of the costs they will have to pay. You’ll also get an estimate on the front end of the process, around the time you apply for a loan.

Even if you’re not using a mortgage loan, you should still have a clear understanding of who pays which closing costs. The escrow company managing the process should have all of this ironed out before you sign any finalized documents to close the deal.

Your real estate agent is another useful resource in all of this. By the very nature of their profession, real estate agents tend to know exactly which closing costs buyers and sellers pay, which ones might be split, and which ones are the most negotiable. Remember, these trends and customs can vary geographically. So be sure to lean on your agent for their local insight and experience.

Have mortgage questions? Bridgepoint Funding has been meeting the financing needs of California home buyers and homeowners for nearly 20 years. Please contact us if you have mortgage-related questions, or if you’d like to receive a home loan quote / estimate. We look forward to helping you.