Cash To Close: Your Closing Day Total
When you’re buying a house, you need to be financially prepared to cover various costs. While you may use a mortgage to cover your biggest expense (your new home), there are other costs that aren’t charged 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 their purchase of a home. These costs can include the down payment and fees related to appraisal, insurance, legal counsel and escrow. The total amount is paid at closing, so buyers should have their cash to close funds ready on closing day.
If you’re buying a home with cash, you’ll pay the entire purchase price at closing. While you won’t need to worry about paying any lender fees, you’ll still want to order a home inspection and title search to protect your investment.
Before you head to closing, learn what fees you’ll owe and how to pay for them.
Closing costs are the fees paid to your mortgage company to finalize your loan. The closing costs that also make up your final cash to close amount may include:
On average, closing costs are about 3% – 6% of your home’s purchase price, and some closing costs can be rolled into the loan amount. Cash to close won’t include any closing costs you’re rolling into your mortgage.
One of the most expensive costs in your cash to close total 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 instantly contributing to the equity in your home.
Depending on the type of loan, there is a minimum down payment you must make. For a Federal Housing Administration (FHA) loan, that minimum is 3.5%. For a conventional loan, it’s 3%. Certain government-backed loans, like Department of Veterans Affairs (VA) loans or US Department of Agriculture (USDA) loans, don’t 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 start out with in your home.
A 20% down payment is ideal because it allows you to avoid paying private mortgage insurance (PMI) premiums. But given the reality of high home prices and low savings rates, 20% may be unattainable for many buyers, particularly in the most expensive real estate markets.
At closing, you’ll reimburse the seller for any prepaid expenses:
- Property taxes: If the seller has prepaid their taxes up to the end of the year, the home buyer will reimburse them for the remainder of the year, and they’ll be expected to deposit a portion of next year’s property taxes into escrow as well.
- Homeowners insurance: You may need to bring proof that you paid the premium to closing or pay it at closing and make a partial prepayment toward next year’s homeowners insurance
- HOA fees: If the seller has prepaid homeowners association (HOA) fees, the home buyer will reimburse them. Going forward, the home buyer will be responsible for paying HOA fees directly to their homeowners association.
Deposits And Credits
While most costs add to your cash to close, some may deduct from it.
For example, your earnest money deposit will be subtracted from your cash to close along with any closing costs you paid before closing. If you’ve already paid your down payment, it 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 may also be eligible for lender credits, which are also deducted from your cash to close.
Just make sure to keep a record of all your credits and payments before closing, in case there are errors on your Closing Disclosure you may have to dispute.
How To Estimate Or Calculate Cash To Close
Let’s take a look at how to figure out how much cash to close will cost you. We’ll use this formula to calculate it:
(Down Payment + Closing Costs) − (Deposits And Credits) = Total Cash To Close
1. Determine The Purchase Price Of The Home
If your offer has 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.
2. Calculate Your Down Payment
Calculate your down payment by determining the percentage of the purchase price you plan to pay. Let’s say you’re buying a $400,000 home and want to make a 6.25% down payment. Your down payment would be $25,000.
3. Estimate Your Closing Costs
At the end of the application process – at least 3 business days prior to close – you’ll receive a Closing Disclosure from your lender that itemizes what you’ll need to be prepared to pay at closing.
But if you’re still in the planning stages, you can estimate your closing costs by multiplying your purchase price – in our case, $400,000 – by 3% and 6%, so your closing costs would be between $12,000 and $24,000.
To stay on the safe side of your estimate, use the result from estimating 6% of the purchase price for your closing costs. Overestimating is always better than underestimating.
4. Add Your Down Payment, Closing Costs And Prepaids
So let’s say you’re going to buy that $400,000 house and make a 6.25% down payment of $25,000, and your closing costs are $24,000. Add these amounts together to get your cash to close:
$25,000 Down Payment + $24,000 Closing Costs = $49,000 Subtotal
Finally, add any prepaids you owe the seller. For simplicity’s sake, let’s assume that you owe the seller $1,000 to cover property taxes for the rest of the year, and the property isn’t connected to a homeowners association:
$49,000 (Previous Subtotal) + $1,000 (Property Taxes) = $50,000 New Subtotal
5. Subtract Any Deposits Or Credits
If you made an earnest money deposit, it’s been sitting in an escrow account to be applied to your down payment at closing. Let’s say you included a $10,000 earnest money check with your offer letter. Finally, we get to do a little subtraction:
$50,000 (Previous Subtotal) - $10,000 (Earnest Money Deposit) = $40,000 Total Cash To Close
If you made any other deposits or earned other credits, you would subtract them from the $40,000 total.
How To Pay Your Cash To Close
It may be known as “cash to close,” but the use of cash is discouraged. It’s not allowed in most states because there isn’t a reliable way to prove the source of the cash.
There are a few ways to pay your cash to close, including:
- Cashier’s check: A 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: A physical check verified by the bank that the borrower of the loan has sufficient funds to pay the amount.
- Personal check: A physical check guaranteed and signed by the borrower of the loan, who is solely responsible for paying the amount.
- Wire transfer: A direct, electronic and immediate transfer of funds from one account to another, with no physical check or any other item used.
- Cash (if allowed): The borrower of the loan uses cash money that is paid immediately.
The Bottom Line
Because the Closing Disclosure arrives 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. As closing day approaches, keep your down payment and closing costs in mind as you reach the final few steps of purchasing your brand-new home.
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