Cash to Close: Breaking It Down

Buying a house is a substantial financial investment that is anything but straightforward. It can be difficult to determine what you’re paying at the end of the day. This is where the cash to close comes into play. This amount tells you what you have to pay when closing on your home. Planning and saving for your cash to close ahead of time can ensure that the closing process is completed quickly and successfully.

What Is Cash to Close?

Essentially, cash to close relates to the total amount of money you need to finalize a real estate transaction. These funds will be due on closing day, so it’s a good idea to understand what they mean and what’s expected of you to ensure a smooth closing process.

While the exact makeup of cash to close may vary depending on the lender, it’s generally comprised of your down payment plus your closing costs minus any previous deposits or credits provided by your lender.

Cash to Close vs. Closing Costs vs. Down Payment

The mortgage world consists of countless terms and definitions that can quickly become confusing and convoluted between the different types of mortgages like bridge loans, conventional loans, and FHA loans; different loan structures; and different loan requirements. The terms “cash to close,” “closing costs,” and “down payments” are often misunderstood by homebuyers.

For starters, closing costs are the costs paid to your lender in exchange for processing and finalizing your loan. The administrative processes performed by your lender to finalize the loan can be extensive and time-consuming -- so they charge you for their trouble. Generally speaking, you should expect to pay anywhere between 2% and 6% of the loan’s value in closing costs.

Some examples of specific closing costs you may incur may include the loan origination fee, the mortgage broker fee, the underwriting fee, the application fee, and the processing fee. You may also choose to pay for discount points to lower your mortgage interest rate effectively.

On the other hand, a down payment is the amount of cash you are putting directly toward the home’s purchase. This is money that you are not securing from a lender and are using your savings, a gift from a family member, or even a down payment assistance grant. Many people falsely assume that you need to put down 20% of the home’s price, but that’s not the case. There are loan options out there that allow you to put as low as 3% down on a home.

What Fees Make Up the Cash to Close Amount?

It can seem like you’re required to pay an endless amount of fees when closing on your mortgage. But what are some of these different fees, and do you need to pay them? Unfortunately, you do have to pay them, but closing costs and seller credits can be negotiated in many cases.

Here are some of the fees that make up the cash to close amount:

Application fees
Origination fees
Appraisal fees
Mortgage insurance
Title insurance
Attorney fees
Taxes

How Much Cash Do You Need to Close?

You find out exactly how much cash you need to close when you receive your closing disclosure from your lender. However, this document is only delivered three days before you close. It would be challenging to come up with all of the cash you need in just three days.

For this reason, it’s usually helpful for you to get a general estimate of the cash you need to close so that you’re prepared to close and officially purchase your new home. Remember that costs will differ based on a variety of different factors. As a result, we will stick with overestimating your cash to close rather than underestimating it.

The first thing you need to know is the purchase price of your home. From there, you can calculate your down payment using the percentage that you’re planning to pay. For example, say you’re putting 3.5% down on a $250,000 house with an FHA loan. Based on this information, your down payment would be $8,750.

Once you have the purchase price and down payment, you can calculate your closing costs. Start by subtracting your down payment from the purchase price of the home to get your loan amount. In this case, your loan amount would be $241,250. From there, you can calculate your closing costs that typically fall between 3% and 6% of your loan amount.

On the lower end, you could expect your closing costs to be about $7,238. On the higher end, you could expect your closing costs to be about $14,475. When planning for cash to close, it’s always better to be over-prepared than under-prepared, so we will use the high end for the rest of our calculations.

Now that we have all the numbers we need, it’s time to add them all to get your final cash to close amount. So we will take the down payment of $8,750 combined with the closing costs of $14,475 to get a total of $23,225.

At the same time, it’s important to keep in mind that you may also be receiving deposits and credits that you’re not accounting for in these calculations. Instead, these credits would be subtracted from your final amount. This is a safe estimate model to help ensure that you’re financially prepared for closing.

How to Pay Your Cash to Close?

Even though the term is “cash to close,” do you really have to pay in cash? The obvious answer is no: You do not have to pay in cash. You technically can, but it would be quite difficult for you to obtain thousands of dollars in cash in such a short amount of time. Instead, there are better, more convenient ways for you to pay your cash to close:

Cashier’s check: A cashier’s check is issued and certified by your bank. Cashier’s checks are known to be very secure thanks to signatures and watermarks that make them hard to forge or counterfeit. When the check is initially issued, the bank uses its own money to cover the cost. When the lender cashes the check, the bank withdraws the amount from your account.
Certified check: A certified check ensures that you have enough money in your account to cover the amount. Certified checks are issued by your bank wherein their sign on to certify that you have sufficient funds. After that, the bank places a hold on your account for the amount of the certified check until it is cashed. Between cashier’s checks and certified checks, lenders generally prefer cashier’s checks.
Wire transfer: A wire transfer electronically sends money to your lender before closing. This process is generally quick and easy since it does not require you to go into a bank for a cashier’s check or certified check. Instead, you can do it over the phone or on the internet using your lender’s SWIFT address. Contrary to popular belief, wire transfers aren’t instant and may take a few days to process -- so make sure you plan for this and complete the transfer well ahead of time.
Personal check: While you may assume that you’d be able to write a personal check to cover your cash to close, many lenders will not allow you to do this. That’s because anyone can write a check for any amount, whether they have the money or not. If you write a check you can’t afford, it bounces and slows down the entire process. Lenders don’t want any checks bouncing, which is why they require certified checks or cashier’s checks that are more guaranteed.
Credit or debit card: Again, you may assume that you could use a credit or a debit card to pay your cash to close since you use them to pay for all sorts of other things. However, doing so could prove problematic. This is because using a credit card is essentially borrowing money from another lender -- something that your mortgage lender doesn’t want to see. On the other hand, even if you have the money in your account and wish to use a debit card, the odds are that your bank will end up blocking such a large transaction to protect you from fraud.

Wrap Up on Cash to Close

You don’t want to show up to closing with not enough cash -- which is why understanding cash to close is so important. That said, this is just one component of closing on your mortgage that you need to worry about -- there are tons of other components along the way that can make or break your home buying process. For the best advice for mortgages, always feel free to reach out to the experts at Vaster Capital.

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