Exactly What Amount Do You Need to Bring to Close On Your New Home?
Cash to close is an expression of a very complex amount of financial engineering. It really doesn’t have anything to do with the money you have in your wallet. To simplify it, cash to close is the amount you will need to bring to your closing in order to finalize your home purchase.
Even if your title company will accept cash, you might not want to bring actual cash. Having a lot of paper cash will set off some alarms and questions from Homeland Security. They may want to know about the source of the funds. It would be better to present your title company with a cashier’s check, wire transfer, or certified check.
The terms “funds to close” or “cash to close” is not to be mistaken for your down payment or closing costs:
- Your “cash to close” is your closing costs and purchase price, minus your earnest money deposit, mortgage amount, and credits that you may have.
- The term “cash to close” is not exactly accurate. Most title companies will not accept large amounts of cash. You also wouldn’t be able to use a personal check.
- They will allow you to use a wire transfer, certified check, or cashier’s check.
To avoid last-minute holdups, it’s best to arrange for your funds a couple of days early.
Cash to Close vs. Down Payments
When thinking about the home-buying process, it’s common to think about the down payment and how you will make it. Our contribution is the down payment, but there is a difference between that the down payment and cash to close.
The final amount that you will need to close on a house is the down payment and all settlement costs, minus your earnest money deposit and any credits you have. This figure can be found on page 1 of the Closing Disclosure form (CD), which is given to you by your lender. Pages 2 and 3 will show your lender’s calculations.
Subtractions and Additions
It seems crazy that it takes two pages to calculate the cost to close. A real estate transaction involves factoring in a lot of costs and credits. Here are some of the biggest items you have to consider:
- Down payment- This is the biggest expense that purchasers can make. The National Association of Realtors said in 2016, the average first-time buyer had a down payment of 6%. For repeat buyers, their down payment was around 14%.
- Closing services- This amount includes title insurance, escrow agent’s fees, and more. When you are buying in a buyer’s market, the buyer may be able to get a seller credit to cover some of these costs.
- Taxes- There are a lot of taxes involved in real estate. When selling a home, taxes can be split between the seller and buyer, or just paid by one party. It will usually be listed in the purchase agreement.
- Prepaid items- It is a cost for homeowners that have less than a 20% down payment. If you do not put at least 20% down, the lender will create an escrow account. The escrow account is used to make sure your property taxes and property insurance are paid on time. To establish the account, the lender will collect money up-front.
- Origination charges- It is money paid to the lender for the underwriting of your mortgage. The charges include an origination fee of 1% of the loan amount, a flood certificate, tax service, and discount points. If you also agree to take a higher interest rate, your lender will give you a credit that will offset closing costs.
Read This Before Making a Wire Transfer
It’s common to move real estate money with wire transfers. There is also a bigger opportunity for abuse as well.
There have been instances involving fraud in which buyers will get an email with instructions that look real. The only problem is that the account number can be changed. This would result in the money transferring into an unknown bank account. Once this money is sent, it’s nearly impossible to get it back.
You should call your closing agent and confirm that the recipient account number and related information are correct before you send a wire transfer. While some people have never heard of this, it is a common thing. In 2018, the federal government arrested 74 people for hijacking wire transfers, many of which dealt with real estate transactions.
According to the Justice Department, $3.7 billion has been lost because of wire fraud. This doesn’t mean that you shouldn’t use a wire transfer, just make sure to double-check that it’s going to the correct people.
Still Have Questions About Cash to Close?
Cash to close can be a complex subject to navigate through. If you have any questions about a home refinance or purchase, it’s best to contact your escrow company. They will be able to steer you in the right direction and answer your questions.