When you receive your Closing Disclosure (CD) from your lender, you are just days away from finalizing your home purchase. This document is provided at least three business days before closing and includes all the financial details related to your transaction. Among these, one crucial figure stands out—cash to close.
Understanding what cash to close means, how it’s calculated, and how to prepare for it will ensure that your home-buying journey concludes smoothly. Let’s break it down step-by-step so you’re ready for the big day.
What is Cash to Close?
Simply put cash to close refers to the total amount of money you must pay at the closing table to finalize your home purchase. This sum typically includes closing costs and down payment, although it can also include other fees specific to your loan or situation.
Why is Cash to Close Important?
The cash to close is the final hurdle between you and homeownership. If you arrive at closing without having the total amount ready or haven’t prepared your payment correctly, it could delay the process or cause the transaction to fall through. For this reason, it’s vital to understand what’s included in your cash to close and how to pay it.
Breaking Down the Closing Disclosure
The Closing Disclosure (CD) is a five-page document your lender provides. It outlines every financial aspect of your home loan and purchase. The CD includes essential details such as the loan amount, interest rate, and a summary of your closing costs, which directly contribute to your cash-to-close amount.
By reviewing your CD carefully, you will understand precisely how much you need to bring to closing, ensuring there are no surprises. Here’s how to interpret the key elements of the CD:
- Loan Amount and Terms: This section details the loan’s principal, interest rate, and total amount borrowed.
- Closing Costs: These fees encompass all the costs of finalizing your purchase, such as appraisals, title searches, and legal fees.
- Cash to Close: This section shows how much money you’ll need to bring to closing to cover the down payment and any unpaid closing costs.
What’s Included in Closing Costs?
One of the most significant components of cash to close is the closing costs, which cover various services and fees that come into play during home-buying. These fees, which may be shared between the buyer and seller or covered by just one party, can vary depending on your location, lender, and specific transaction.
Common Closing Costs
While each closing may have unique costs, several typical fees make up the closing costs for most transactions. Here’s a breakdown of the most common ones:
- Appraisal Fee: Lenders require an appraisal to determine the home’s fair market value. This fee, usually paid by the buyer, ensures that the loan amount aligns with the home’s worth.
- Title Insurance: Title insurance protects you and the lender in case someone else tries to claim ownership of the property after the sale. This fee can vary, but it’s a critical part of the transaction.
- Attorney Fees: In some states, an attorney is commonly involved in preparing documents, conducting title searches, and overseeing the closing process. These fees can vary widely depending on the complexity of the sale.
- Loan Origination Fee: This fee covers the lender’s administrative costs for processing your loan application. It’s typically 0.5% to 1% of the total loan value.
- Pest Inspection Fee: In some areas, pest inspections are required to ensure the property is free from termites or other infestations that could cause structural damage.
- Mortgage Insurance Premium (MIP): If you’re taking out an FHA loan or another type requiring mortgage insurance, you may need to pay an upfront premium at closing.
- Application Fee: This fee covers processing your loan application, including pulling your credit report and evaluating your financial documents.
Other Potential Closing Costs
In some cases, you may encounter additional fees, such as:
- Homeowners Association (HOA) Fees: If the home you’re purchasing is part of a neighborhood with an HOA, there may be upfront fees for joining or transferring ownership.
- Transfer Taxes: In some states, local governments charge a tax on the transfer of real estate property from one owner to another.
- Recording Fees: These fees are paid to the local government for recording the property transfer in public records.
Your closing disclosure will list these fees individually so you’ll understand what you’re paying for.
How the Earnest Money Deposit Impacts Cash to Close
Most homebuyers pay an earnest money deposit (EMD) when their offer is accepted. This deposit, typically between 1% and 2% of the home’s purchase price, shows you’re serious about buying the house. The EMD is usually held in escrow during the buying process and applied toward your closing costs or down payment at closing.
For example, if you paid $2,000 in earnest money, that amount will be deducted from your total cash to close, reducing what you need to bring to closing.
Understanding Your Down Payment
The most significant portion of cash to close usually comes from your down payment. Depending on the type of loan you’ve secured, your down payment could range from as little as 0% (for VA loans) to as much as 20% or more (for conventional loans). The larger your down payment, the lower your loan amount will be, which can save you money in the long run by reducing your interest payments.
Here are some common down payment scenarios:
- FHA Loans: These loans often require a down payment of 3.5%.
- Conventional Loans: You can typically put down between 5% and 20%. Remember that if your down payment is less than 20%, you may need to pay for private mortgage insurance (PMI), which will add to your monthly costs.
- VA Loans: These loans, available to veterans and active-duty military members, often require no down payment.
Be sure to discuss your down payment options with your lender early on in the process so you can plan for how much cash you’ll need to close.
Paying Your Cash to Close
When closing day arrives, you must bring your cash to close. While “cash” is in the name, you won’t be expected to bring literal cash to the closing table. Instead, there are a few secure methods for transferring the necessary funds.
Common Payment Methods
- Cashier’s Check: A cashier’s check is one of the most secure ways to pay your cash to close. You can obtain this type of check from your bank or credit union. Before requesting the check, you’ll need to know the exact amount you owe and to whom the check should be made payable.
- Wire Transfer: Some buyers wire their cash to close directly to the closing agent’s account. Wire transfers can take a few days to process, so allow extra time. Verifying the wire transfer details with your lender is essential to avoid fraud.
- Certified Check: Similar to a cashier’s check, a certified check is another safe method of payment that guarantees the funds are available.
Methods to Avoid
While cashier’s checks and wire transfers are standard, some forms of payment are not typically accepted for closing due to security concerns:
- Personal Checks: Personal checks are rarely accepted due to the risk of insufficient funds and processing delays.
- Credit or Debit Cards: Lenders typically don’t allow buyers to use credit or debit cards to pay their cash to close, as this would increase your debt load just as you’re purchasing the home.
- Physical Cash: Due to the large amounts of money involved, physical cash is not an acceptable form of payment at most closings.
Preparing for Closing Day
As your closing day approaches, your lender and real estate agent will work with you to ensure everything is in order. It’s essential to review your Closing Disclosure as soon as you receive it and confirm that all the numbers are accurate. If anything seems unclear or incorrect, contact your lender immediately to resolve the issue before closing.
On closing day, be sure to bring your form of payment, a valid ID, and any other necessary documentation. Your real estate agent or closing attorney will guide you through signing the final paperwork, and once everything is completed, you’ll receive the keys to your new home!
The Bottom Line
Understanding your cash to close is crucial for ensuring a smooth closing process. This figure includes your down payment, closing costs, and other related fees. By reviewing your Closing Disclosure carefully and preparing your payment in advance, you’ll avoid last-minute surprises and be ready to finalize your home purchase. Whether you use a cashier’s check or wire transfer, know precisely how to pay and what’s included in your cash to close. With everything in order, you’ll soon celebrate your new home ownership.
FAQs
How do you figure out cash to close?
Cash to close is calculated by adding the down payment and closing costs and subtracting any credits or deposits you’ve already paid.
How much cash do you need to close?
The amount depends on your loan type, down payment, and closing costs, typically ranging from 3% to 6% of the home’s purchase price.
What does cash to close to borrower mean in a refinance?
In a refinance, cash to close refers to the amount the borrower needs to pay to complete the refinancing process, including fees and any outstanding balances.