When it comes to purchasing a home, you need to be financially prepared. While you may use a mortgage to cover your biggest expense, your new home, there are still costs that aren’t covered by a lender. Many of these expenses fall into what’s known as “cash to close,” and you’ll want to have these funds ready by the time you’re ready to purchase your home.
What Is Cash To Close?
Cash to close refers to the funds a home buyer needs to finalize a real estate purchase. These can include the down payment in addition to fees related to appraisal, insurance, legal counsel and escrow. The total amount is paid at closing, so buyers should have cash to close funds ready for closing day.
Before you head to closing, learn what costs you may need to pay and how to pay for them.
Closing costs are fees paid to your mortgage company that are needed to finalize your loan. In addition to other fees, cash to close includes closing costs, which may include:
- Application fees
- Appraisal fees
- Mortgage insurance
- Title insurance
- Attorney fees
Closing costs are about 3% – 6% of your home’s purchase price, on average, and some closing costs can be rolled into the loan. Cash to close does not include any of those costs.
One of the most expensive costs in your cash to close will be the down payment. A down payment is a percentage of the purchase price that you pay upfront, lowering the amount you have to borrow and contributing to the home equity you start out with.
Depending on the type of loan, there is a minimum down payment you must pay. For an FHA loan, that minimum is 3.5%. For a conventional loan, it’s 3%. Certain government-backed loans, like the VA loan or USDA loan, do not require a down payment.
How much you pay above the minimum is up to you. Just remember, the more you pay, the less you borrow and the more equity you’ll have. A 20% down payment is recommended to avoid paying mortgage insurance.
Deposits And Credits
While most costs add to your cash to close total, some may also be deducted from it.
For example, your earnest money deposit may be subtracted from the total, along with any closing costs you pay before closing. If you’ve already paid your down payment, that will be deducted from your cash to close, too. If you have any seller credits (costs the seller has agreed to pay), they will be subtracted from your cash to close as well. You also may be eligible for lender credits, based on your chosen interest rate, which are also deducted from your cash to close.
Just make sure to keep a record of all of the credits and payments you make before closing, in case there are any errors on your closing disclosure you may have to dispute.
How To Estimate Or Calculate Cash To Close
Your closing disclosure should report all costs due at closing. However, this document is typically delivered 3 days before closing (never later), which doesn’t give you much time to gather the money needed to close your loan – if you don’t have your funds ready before that. You do not want this amount to be a surprise, especially if it’s an amount you can’t afford to pay.
Here’s how to get a good estimate of your cash to close:
- Determine the purchase price of the home. If your offer’s already been accepted, you’ll know the exact number. If you’re still looking for a home to buy or haven’t started your search, decide the maximum purchase price your budget allows and use that number.
- Calculate your down payment by determining the percentage you plan to pay. For example, if you plan on paying 3% on a $200,000 house, your down payment would be $6,000.
- Calculate the closing costs using the percent of the purchase price that is typical for closing costs (3% – 6%). For example, 3% of $200,000 is $6,000 and 6% of a $200,000 house is $12,000. You can expect your closing costs to be between $6,000 and $12,000.
If you want to stay on the safe side of estimating, use 6% to estimate the closing costs. Overestimating is always better than underestimating.
- Add your down payment and closing costs together to get your cash to close. In this example, $6,000 plus $12,000 is $18,000. You can expect to pay $18,000.
- If you know of any deposits or credits you’ll have, subtract those from your cash to close total in step 4.
Basically, the formula for calculating your cash to close is: (Down payment + closing costs) – deposits and credits = total cash to close.
How To Pay Your Cash To Close
There are a few ways to pay your cash to close, such as:
- Cashier’s check – physical check guaranteed and signed by the bank because the institution, not the borrower of the loan, is responsible for paying the amount
- Certified check – physical check verified by the bank that the borrower of the loan has sufficient funds to pay the amount
- Personal check – physical check guaranteed and signed by the borrower of the loan, who is solely responsible for paying the amount
- Wire transfer – direct, electronic and immediate transfer of funds from one account to another, no physical check or any other item used
- Cash, if allowed – physical dollar bills immediately paid
While it’s called “cash to close,” physical cash isn’t the best payment method. In many cases, it’s not even allowed because there isn’t a way to prove the source of this money. It also leaves less of a paper trail.
Start Preparing Early
Thanks to a closing disclosure, you’ll know the total amount of money you’ll need to bring to your mortgage closing. This cash to close amount will include closing costs, credits and your down payment – expected to be paid at closing by check, wire transfer, or in some cases, cash. Since the closing disclosure comes just a few days before closing day, you’ll want to prepare for cash to close ahead of time. This will ensure you have enough money to pay the required amount to close your mortgage loan.