Do closing documents need to be on legal sized paper or is letter acceptable?

Letter size should be fine. Which documents are you talking about? If they are documents that are going to be recorded then you should check with the county clerk but I doubt they require legal size as long as all of the page is legible.

Yes, some courts have their own specific guide lines. Checking with the court may be the best thing to do

... If they are documents that are going to be recorded then you should check with the county clerk ...

I suspect that recording offices used to charge a per-page fee for recording and thus legal-size paper begin to be used to save money. In my opinion, legal-size paper is an all-around nuisance. Fortunately it's use is going out of style.