What Is Cash To Close? Preparing To Close On Your Home

Keeping up with all the terms you’ll need to know throughout the home buying process can raise a number of questions. For example, cash to close and closing costs appear as if they can be used interchangeably, but have a few key differences. Let’s explore what cash to close is, and how to keep things running smoothly on closing day.

What Is Cash To Close?

Cash to close is the total amount owed on the day of your closing to finalize the sale between the home buyer and the seller. The seller will typically receive payment for the full purchase price within a day or two of closing, but this can be as little as just a few hours.

The phrase “cash to close” is a bit deceptive because the most common payment forms are often a cashier’s check and a wire transfer. Depending on the state and the mortgage lender, you may also be able to pay by personal check, certified check or debit card. It’s best to confirm with your real estate agent the payment types that will be accepted at your closing.

The Difference Between Closing Costs And Cash To Close

Although closing costs and cash to close sound similar, these two terms are distinct. Let’s take a look at what sets them apart.

Closing Costs

Closing costs are fees you’ll need to pay on closing day, and they cover a range of expenses incurred over the home buying process. Usually, closing costs are about 3% to 6% of your mortgage loan. They can include:

• The appraisal fee: To assess the value of your soon-to-be new home, lenders typically require a home appraisal that confirms the home’s value matches or exceeds the mortgage loan amount.
• Attorney’s fees: It’s possible you’ll need to hire an attorney to take a look at the paperwork for buying your home. Attorney’s fees can be costly, but a real estate attorney’s expertise can save you money and offer some extra peace of mind.
• Inspection fees: Depending on the type of loan you’re using, you may be required to pay a number of inspection fees to ensure the house is in livable condition. These can include pest inspection fees and environmental inspection fees.
• Origination fees: Sometimes called origination charges, these fees go directly to your mortgage lender to cover the cost of processing the application for your loan.
• Title insurance: Title insurance offers protection to you and your lender if a claim, such as a lien, is discovered on your property at some point in the future. Title insurance isn’t a legal requirement for the homeowner, but it provides an extra layer of protection for you. Unlike owner’s title insurance, which is optional, lender’s title insurance is mandatory.
• Underwriting fees: These are fees your lender charges for administrative tasks like confirming your assets, property research and preparing your loan paperwork.

These are just some of the fees that your closing costs may include. Although these fees add to the upfront cost of your home, most are intended to protect you, your mortgage lender or your home.

Cash To Close

The total amount of money you’ll pay for your home will vary based on the purchase price and variables that can even include requirements particular to an individual state. Cash to close includes your closing costs, your down payment, mortgage interest and payments held in escrow (homeowners insurance and property taxes). Subtracted from this is any credits you have toward the cost of purchasing your home. These credits may include:

• Earnest money deposit: Earnest money typically goes into an escrow account when you first make an offer on a house. The deposit is made to let the seller know you’re committed to the offer and intend to purchase the home, barring something unforeseen.
• Lender credits: Lender credits are fees you can negotiate with your mortgage lender. Based on the terms you’ve agreed on, you may receive these credits at closing in exchange for a higher mortgage interest rate.
• Seller concessions: These are payments made by the seller to offset closing costs or issues discovered during the home buying process. Sometimes, these are called seller credits. It’s more likely a homeowner will agree to pay seller concessions in a buyer’s market or when they’re eager to sell their home quickly.

Keep in mind that any number of factors can affect your total cash to close. For example, not every property will require a down payment. VA loans for eligible active-duty military, National Guard or Reserve service members, veterans and surviving spouses typically won’t necessitate putting money down. Similarly, USDA loans don’t usually involve a down payment. Your closing costs, loan type and any credits will all affect your total cash to close.

How To Estimate Your Cash To Close Amount

You can work with your lender and use information from a few critical documents to estimate your cash-to-close amount.

After you submit your mortgage application, your lender provides a Loan Estimate. The document details your estimated interest rate, closing costs, monthly mortgage payment and outlines other key loan terms. While a Loan Estimate won’t provide a final total, the estimate gives a good idea of what you should expect to pay at the closing table.

At least 3 business days before closing, your lender provides a Closing Disclosure. The disclosure outlines the final terms and costs of your mortgage.

While the formula you use and how you calculate your estimated cash to close may vary, you can use this formula to estimate your cash to close at the beginning of the home buying process:

Cash To Close = (Down Payment + Closing Costs) − (Deposits And Credits)

When you get closer to finalizing the purchase, carefully read through your Closing Disclosure. Talk to your lender if the total significantly differs from your Loan Estimate or estimated cash to close.

Preparing For Closing Day

To avoid hitting a snag on closing day, you’ll want to take a few steps to ensure your funds are accessible for an easy transaction.

Review Your Closing Disclosure

Before closing on your new home, be sure to review your Closing Disclosure. This is a 5-page document you can expect to receive from your mortgage lender at least 3 days before your closing date. It should include all the details of your closing costs, mortgage terms, loan amount and monthly mortgage payments.

Reviewing this document in detail is important because it verifies whether all the costs and fees are in line with the agreement you made with your mortgage lender. The Closing Disclosure also reveals the amount of money you’ll need for closing day.

If you catch a mistake or inconsistency, you’ll want to contact your lender to discuss adjusting the Closing Disclosure. If you’re unsure on any details such as the amount of cash to close, check with your real estate agent or lawyer to confirm.

Consolidate Your Cash To Close

A home purchase is one of the largest investments you’ll make during your life. Since you may need a lot of capital but it’s unlikely all your money is in one place, consider consolidating money from multiple accounts into one bank account a couple of weeks before closing.

This will help ensure any transfers have time to clear so your funds are available to withdraw. Consolidating your estimated cash to close will make it easy to issue a cashier’s check or make a wire transfer a few days in advance of your closing. Likewise, if you’re paying via personal check or another method, having your money all in one place will streamline the closing process.

The Bottom Line

The home buying process can be detailed and lengthy. So why not prepare to make closing day short? Reviewing your Closing Disclosure and knowing your total cash to close can help make your closing day more efficient and seamless.

Excited to start your home buying journey? Being prepared when the right house comes along is essential. Before you make an offer on a home, start the mortgage application process today.