Even before starting your home-buying journey, you're probably aware that the numbers aren't just about the purchase price and your down payment. There are dozens of smaller fees, expenses, credits, and adjustments in a real estate transaction that you need to account for.
This is where the term "cash to close" comes into play. Cash to close is the amount you need to bring on closing day to finalize the sale, and it's a crucial aspect of the home-buying process.
In this post, learn more about cash to close, how it differs from closing costs, and what it includes. Understanding how much cash to close you'll need will help you prepare the funds in advance for a smooth, stress-free closing.
Cash to close, also known as funds to close, is the total amount of money a home buyer needs to bring to the closing table to finalize a real estate purchase. You can think of it as the grand total you'll need to pay on closing day to officially become a homeowner.
The funds typically include your down payment and closing costs, prepaid expenses such as property taxes and homeowners insurance, and any escrow deposits you've made to set up your mortgage account. However, any deposits you've already paid and any credits you've received will be subtracted from your total.
Knowing your cash to close in advance is crucial because you need to have the necessary funds ready by closing. You'll find the exact amount you owe on your Closing Disclosure, in the section labeled "Calculating Cash to Close," which your mortgage lender should provide at least three business days before closing. This document itemizes all your closing costs and explains how your total was reached and how it differs from the estimate you received at the start of the mortgage process.
As you go through your home-buying journey, you'll often encounter the terms "closing costs" and "cash to close." Let's go over how they differ:
- Closing costs are the fees you pay to your lender and other parties to close on a house and transfer legal ownership into your name. In most markets, closing costs add up to about 2% to 5% of the home's purchase price. Title insurance, appraisal, escrow services, and lender underwriting and origination fees are all examples of costs needed to complete the real estate transaction.
- Cash to close is the total amount you need at closing to complete the home purchase, including closing costs and your down payment. It then subtracts any fees and the earnest money deposit you may have paid when your offer was accepted, along with any seller credits and refunds for overpayments.
To put it simply, closing costs are just one part of your cash to close, and the two terms aren't interchangeable.
Your cash to close is made up of several parts, and understanding each one helps you see where your money is going and where you can squeeze in a little savings. To break it down further, here are the typical costs that make up your cash to close:
1. Down payment: This is the amount you pay upfront, usually a percentage of the home's purchase price, while the rest is covered by your loan. It's typically the largest share of your total cash to close. For conventional loans, it ranges from 3% to 20% of the total home cost, while FHA loans can be as low as 3.5% of the purchase price. Some government-backed programs, such as VA or USDA loans, allow eligible buyers to purchase a home with no down payment.
2. Closing costs: As mentioned above, these are one-time fees associated with finalizing the home purchase, typically totaling between 2% and 5% of the home's purchase price. These costs may vary depending on the loan type, the lender, and the state where you're buying. Some of the most common closing costs for home buyers include:
- Appraisal fee
- Loan origination fee
- Title search and title insurance
- Transfer taxes
- Credit report fee
- Recording fees
- Attorney fees (in some states)
- Homeowners association (HOA) fees (if the home is within an HOA)
- Other administrative expenses
3. Prepaid expenses: These are homeownership expenses that the seller has already covered for the remainder of the year. Your lender will usually hold the funds in an escrow account until the applicable payments are made. Most of these costs vary depending on your property, location, and closing date, and include prorated property taxes, the first year of homeowners insurance, mortgage interest, and HOA fees. These costs make sure certain bills are current when you move in, and any unused expenses will be reimbursed to the seller.
4. Deposits and credits: Any money you've already put toward your down payment, closing costs, or other purchase expenses will appear as deductions from your cash to close. This may also include any appraisal or inspection fees you've paid out of pocket, as well as credits you receive from the seller or lender. Remember to keep records so you can discuss any discrepancies with your lender and lower what you need to pay on closing day.
To Estimate Your Cash to Close, Here's a Simple Equation Most Lenders Use:
💰Cash to Close = Down payment + Closing costs + Prepaid expenses – Credits and deposits
Bottom Line
Beyond your down payment and closing costs, understanding your estimated cash to close and everything it includes is a key part of your home-buying journey. Staying on top of these details is crucial so you won't be caught off guard when you receive your Closing Disclosure and see the amount you owe on closing day.
Ample preparation, including setting aside enough money, anticipating the total costs of homeownership, and having a trusted real estate agent by your side, will help make your real estate journey smoother and easier. This way, you can focus on closing day and celebrate finally becoming a homeowner.
