A home can be one of the most exciting—and also one of the most complicated—purchases. It may already appear to be a difficult task to concentrate on all the necessary details of buying a home, such as square footage, school district, inspections, and appraisals. As a result, it’s common for buyers to be perplexed about what to expect on closing day. There are several requirements for closing day. The phrase “cash to close” is the one that has the most potential to catch buyers off guard. The amount of money you must bring with you on the closing day is referred to as cash to close.
However, cash to close includes all potential day-of costs, including credits and points, in addition to your down payment and final closing costs. Continue reading to find out what cash to close is, how it differs from closing costs, and what payment options you have.
What is Cash to Close?
The total amount of money you’ll need to pay on closing day to finalize the home purchase transaction is referred to as “cash to close.” Unless you’re doing a dry closing, you’ll need to know the cash-to-close amount ahead of time so you can prepare the funds at closing.
Estimated Cash To Close
All closing costs should be reported in your closing disclosure. However, because this document is typically delivered three days before closing (never later), you won’t have much time to gather the funds needed to close your loan if you don’t have them ready before then. You don’t want this amount to come as a surprise, especially if it’s one you can’t afford.
Here’s how to obtain an accurate loan estimate of your cash to close:
- Determine the home’s purchase price. If your offer has already been accepted, you will be aware of the exact figure. If you’re still looking for a home to buy or haven’t begun your search, determine the highest purchase price your budget allows and stick to it.
- Calculate your down payment by calculating the percentage you intend to pay. For example, if you intend to pay 3% on a $200,000 home, your down payment would be $6,000.
- Determine the closing costs using the typical closing cost percentage of the purchase price (3–6 percent). For example, 3% of $200,000 is $6,000, and 6% of a $200,000 house is $12,000. Closing costs should range between $6,000 and $12,000.
If you want to be on the safe side, estimate the closing costs at 6%. Overestimation is always preferable to underestimation.
- Add together your down payment and closing costs to get your cash to close. $6,000 plus $12,000 equals $18,000 in this example. You should budget $18,000 for this.
- If you know you’ll have any deposits or credits, subtract them from your cash to close the total in step 4.
Essentially, the cash to close formula is (down payment + closing costs)-deposits and credits = total cash to close.
Closing Cost vs. Cash to Close
Your cash to close and closing costs are intertwined but distinct. Closing costs are the fees you pay to your mortgage company to complete the closing on your home loan. The “cash to close” amount, on the other hand, is the total amount (including closing costs) that you’ll need to bring to your closing to complete your real estate purchase.
The specific closing costs you pay are determined by your loan type, state, down payment, and loan amount. A few examples of common fees are listed below.
An appraisal is a professional third-party estimate of the value of the home you’re considering purchasing. Lenders require appraisals to ensure that the house is worth the loan amount.
In some states, you may need to hire a real estate attorney to finalize your title transfer. The attorney’s fee covers the cost of having your paperwork reviewed by a legal expert.
Title insurance protects you from third-party claims on the new title to your home. Also, title insurance companies ensure that the person selling you the house has title rights.
They also look for bankruptcies, liens, and other factors that could lead to you losing your home. You only pay for title insurance once, at closing, and you’re covered for as long as you own the house.
Lenders charge application fees to process your mortgage application.
Mortgage lenders charge origination fees to underwrite your loan.
Private mortgage insurance:
If you use a conventional mortgage and put less than 20% down, your mortgage lender will require you to purchase private mortgage insurance (PMI). If you default on your loan, PMI protects your lender. When you reach 22% equity in your home, your PMI is automatically terminated. At closing, you may pay your first month’s PMI premium.
FHA, USDA, or VA fees:
If you take out a government-backed loan, you may be required to pay a fee to the lending agency. These fees cover administrative expenses and help to keep the programs running.
- FHA loans require a 1.75 percent upfront mortgage insurance premium as well as a monthly fee.
- Depending on the amount borrowed and your service history, VA loans may require a one-time VA funding fee.
- USDA loans require a 1% upfront guarantee fee and a 0.35 percent annual fee.
Pest inspection fee:
In some states, a pest inspection is required before you can close on your mortgage.
Cash to Close
The total closing costs minus any fees rolled into the loan amount are included in the cash to close. It also includes your down payment, minus any earnest money deposit you made when your offer was accepted, as well as any seller credits. It also includes any refunds for overpayments or other credits. The following are the components of the typical cash to close:
Your down payment is most likely a significant portion of your total cash to close. Your down payment is a percentage of the purchase price of your home that you pay to your lender up-front. A down-payment may not be required if you obtain a government-backed loan (such as a VA loan or a USDA loan).
If you have already made a down payment with your lender or paid closing costs, you will see a reduction in your cash to close. Keep meticulous records so that you can discuss any discrepancies with your lender.
Cash to Close Calculator
To estimate your total closing costs for purchasing a home, use the closing cost calculator.
Where Can you Find the Closing Amount?
You can determine how much you need to pay for each of your closing costs by reviewing your closing disclosure. You should carefully review it to ensure that your lender credited you for any prepayments.
Your Closing Disclosure itemizes your closing costs, informing you of the exact amount you owe for each fee or charge. Because it includes your down payment, your cash-to-close amount is usually greater than your total closing costs.
Compare your closing disclosure to your loan estimate before signing on the dotted line. Your closing disclosure charges, interest rate, and loan terms should be very similar to your loan estimate. If a charge has changed between your loan estimate and your closing disclosure, you should talk to your mortgage lender about it.
How Will You Pay Your Cash to Close?
There are several options for paying your cash to close. Cashier’s checks, certified checks, and wire transfers are more secure forms of payment. Credit cards, debit cards, and personal checks may be accepted but are not advised.
Your bank will certify a cashier’s check. They initially pay for your charge with the bank’s own funds. The bank withdraws funds from your account after the lender cashes your check. Cashier’s checks have security features such as signatures and watermarks that make them difficult to forge. A cashier’s check can be obtained by requesting one from your local bank or credit union. The majority of lenders prefer these over certified checks.
A certified check informs the lender that you have sufficient funds in your account to cover the cost. When you request a certified check from your local bank or credit union, they will verify that you have sufficient funds in your account and will sign the check. Finally, the bank holds the funds in your account until the check is cashed by the lender.
Before closing, you can use wire transfers to send money electronically to your lender. You can request a wire transfer from your bank in person, over the phone, or even over the internet. If you can’t make it to the bank in person before closing, a wire transfer is a great option.
To complete wire transfers, most banks use the Society for Worldwide Interbank Financial Telecommunication (SWIFT) service. In order to know where to send your funds, ask your mortgage lender for their SWIFT address. Keep in mind that wire transfers are not instant, and your lender may not receive the funds for several days. Also, because wire transfers are irreversible, double-check the address before sending money.
Although your lender may accept cash at the closing, it is not a recommended payment method. When you use paper money to pay for your closing, you may raise questions about where the money came from. Some title companies and mortgage lenders have even prohibited cash payments at closing.
Debit or credit card
Before they approve your loan, your lender must know that you have the funds in your account for closing costs. Because credit cards allow you to borrow money from creditors, they pose a risk to lenders. Credit card companies also block large and unusual charges based on your spending habits, so even if you have a debit card, your closing costs will almost always be automatically blocked.
Even if they don’t have enough money to cover the bill, anyone can write a personal check for any amount. When a check bounces, it means you wrote a check for more money than you have, and the bank usually takes a few days to figure this out. To cover your closing costs, lenders may require you to go to the bank and obtain a certified or cashier’s check.
The total amount you must pay when you close on your mortgage is referred to as “cash to close.” It consists of three major components: the remainder of your down payment; closing costs, and prepaid, which include per diem or prorated mortgage interest.
Frequently Asked Questions
What does it mean cash to close to borrower?
Cash to close, also known as “funds to close,” is the total amount you must pay on the day of your closing. Your cash to close includes expenses like your down payment, closing costs, and prepaid items.
Is cash to close the same as closing costs?
Closing costs are the fees you pay to your mortgage company to complete the closing on your home loan. The cash to close, on the other hand, is the total amount – including closing costs – that you’ll need to bring to your closing in order to complete your real estate purchase.
Why is cash to close lower than closing costs?
Closing costs are the fees you pay to your lender in order for your loan to be closed. Cash to close, on the other hand, is the total amount you must bring to the closing table in order to complete your real estate purchase. As a result, closing costs can raise your closing costs while credits can lower them.
How do you figure out cash to close?
Essentially, the cash to close formula is (Down payment + closing costs) – deposits and credits = total cash to close.
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