What Is Cash to Close in Real Estate

When buying a house, you will face many fees that you need to pay before finalizing the transaction. One of these charges is the cash to close.

Even if you are taking out a loan, you will still need to pay for certain costs in order to complete your home purchase. If you are not sure what these would be, then read on to learn more about cash to close:

What it means
How it is different from closing costs
Where to find the amount you owe at closing
How to calculate your cash to close
How to pay for it

What Is Cash to Close?

Also referred to as “funds to close”, cash to close is the total amount of money you will need to pay on closing day to finalize your home purchase.

Does cash to close include a down payment? Yes, it usually does. It also includes fees related to appraisal, insurance, legal counsel, and escrow.

Despite the term, it does not refer to paying with actual cash–it is actually not recommended to pay this way as it may not be accepted. So check with your lender or real estate agent what forms of payment they will accept. You may have to bring a notarized check, which is something that you want to prepare ahead of time.

The Difference Between Cash to Close vs Closing Costs

Whereas cash to close is what you pay to complete your real estate transaction, closing costs refer to the fees you pay to your lender to finalize your loan. Closing costs are actually included there, but you may also pay for them ahead of time.

What Goes Into Closing Costs

Here are the closing costs you should know about

The specific closing costs you will need to pay may depend on your loan type, loan amount, state, and down payment. Here are some of the fees you might encounter as part of the closing costs:

Appraisal Fees

An appraisal is an estimate of how much the home you are buying is worth. It is typically done by a professional and should not have a conflict of interest with either buyer or seller. Lenders require an appraisal before fully approving the loan to make sure that the house is worth the amount that they are lending.

Attorney Fees

In some states, you are required to hire a real estate lawyer who will finalize the title transfer. The attorney fee covers the cost of having a legal expert look over your paperwork.

Title Insurance

This protects you from third-party claims to the title of your new home. Title insurance companies make sure that the person selling you the property has the rights to the title. They also search for bankruptcies, liens, and other factors that might cause you to lose your home.

You only have to pay for title insurance once during the closing, but it will protect you for as long as you own the home.

Application Fees

Lenders charge this fee to process your mortgage application.

Origination Charges

This is to cover the underwriting of your loan.

Private Mortgage Insurance (PMI)

If you are making a down payment that is less than 20% of the purchase price, your mortgage lender will need you to buy a PMI. This helps protect your lender in case you default on your loan. Once you reach 22% equity in your home, your PMI is automatically canceled. You may pay the first month of your PMI premium upon closing on your mortgage.

FHA, USDA, or VA Fees

If you take out a government loan, you might need to pay a fee to the agency supporting the program. These fees cover administrative costs and keep the programs going.

The FHA loans require an upfront mortgage insurance premium of 1.75% and a monthly fee.
The VA loans charge a one-time VA funding fee depending on how much you are borrowing and how long you have served.
The USDA loans need an upfront guarantee fee of 1% and an annual fee of 0.35%.

Pest Inspection Fee

In some states, you have to pay for a pest inspection before you can close on your mortgage.

Do Closing Costs Have to Be Paid in Cash?

You will have to check with your lender or real estate agent if they will accept cash payment for your closing costs. Most of the time, they do not. However, there are a lot of options that you can use, and many of them do not come out of your pocket. Instead of paying in cash, you can also:

Pay from your personal checking or savings account.
Roll it into your mortgage.
Ask for seller credit.
Request for gift funds from your family.
Apply for government assistance programs.

What Is Included in Cash to Close

Cash to close includes your total closing costs and down payment, then subtracts the earnest money deposit you may have made when your offer was accepted. Seller credits, overpayments, and other credits are deducted as well.

Down payment

In case you are wondering: when is the down payment due? Since it is included in the cash to close, you will pay for it on the day that you finalize the sale. A down payment is a percentage of your home’s purchase price that you pay upfront to your lender. It likely makes up a large percentage of your total cash to close. But if you get a certain type of government loan, you may not need to pay this.

Credits

This relates to any amount of money you have already put down, such as your down payment or closing costs that you paid in advance. If you have done this, you will see a deduction from the total amount. Make sure to keep careful records of what you have already paid for so you can bring up any discrepancies with your lender.

Where to Find the Amount You Owe at Closing

You can find out how much you need to pay for each of your closing costs by looking at the Closing Disclosure. This document itemizes your closing costs and tells you how much you owe for each fee. Make sure to review it closely and check that your lender has credited you for any prepayments you made.

Your cash to close amount is usually higher than your total closing costs because it includes your down payment unless you have already paid that in advance.

Before signing onto your loan, compare your Closing Disclosure with your loan estimate. The charges, interest rate, and loan terms on the document should be similar to your loan estimate. If you notice any discrepancies, you should discuss them with your mortgage lender before signing.

How to Calculate Your Cash to Close

You will usually get your Closing Disclosure around 3 days before closing, which may not give you a lot of time to prepare the money you need to close your loan. So it is best to know the amount you need to pay ahead of time. Here is a step-by-step on calculating cash to close:

Start with the purchase price of the home you want to buy. If your offer has already been accepted, use the exact number of how much you are paying. But if you are still looking for a property or have not even started your search, you could use the maximum purchase price you are willing to pay as your estimate.
Calculate your down payment by determining the percentage you plan to pay. For example, if you plan to make a down payment of 20% on a $200,000 house, your down payment would be $40,000.
Compute for the closing costs using the percent of the purchase price that is typical for this expense, which is 3% to 6%. So for the $200,000 home in this example, the closing costs may range from $6,000 to $12,000. Use the maximum percentage to be on the safe side of estimating.
Add your down payment and closing costs together to get the amount of your cash to close. In this example, $40,000 plus $12,000 is $52,000.
If you know of any deposits or credits you expect to have, you can subtract those from the total amount.

How to Pay Your Cash to Close

There are several ways for you to pay your cash to close. The more secure forms of payment are cashier’s checks, certified checks, and wire transfers. Meanwhile, credit cards, debit cards, and personal checks might be accepted by some lenders but they are not recommended.

Cashier’s Check

A cashier’s check is certified by your bank and includes security features like signatures and watermarks, which is why it is what most lenders prefer over other forms of payment.

When you request a cashier’s check from your local bank or credit union, they will initially use their own money to pay for your charge. Once your lender cashes the check, the bank withdraws the money from your account.

Certified Check

This tells the lender that you have enough money in your bank account to cover the cost. When requesting a certified check from your bank or credit union, they will first make sure that you have the needed funds in your account before signing your check. Then the bank locks the amount in your account until the lender cashes the check.

Wire Transfer

Doing a wire transfer is a great option in case you cannot make it to the bank in person before your closing date. With this option, you can electronically send money to your lender. What you will need is your lender’s SWIFT address and other necessary information so you know where to send your funds. Then you ask your bank to do the wire transfer from your account.

However, domestic wire transfers may take between 24 hours and three business days for your lender to receive the funds. Also, make sure that you double-check the address before sending the money, as wire transfers are irreversible.

Credit or Debit Card

Using your credit card or debit card is not recommended as it does not provide a guarantee that you have the money to pay for closing costs.

Credit cards allow you to borrow money from a creditor, which can be risky for lenders. Also, the company that issued your credit card or debit card automatically blocks large and unusual charges based on your spending habits.

Personal Check

You can write and issue a personal check for any amount even if you do not have the money to cover it. When you have written a check for more money than you have in your account, the check bounces, and it can take a few days for the bank to figure this out. Because of this risk, your lender may require you to get a certified or cashier’s check instead.

Cash

While paying with cash technically settles the account immediately, it may set off questions about where the money came from. Thus, many lenders do not accept this form of payment.

Prepare Your Funds for Your Next Home Purchase

Paying your cash to close is the final hurdle you have to face before you can own your new home. It covers all of the expenses that you have to pay upfront, such as the down payment and closing costs. Meanwhile, your earnest money deposit and other credits you negotiated with the seller are deducted from it.

Because you only get the total amount in the Closing Disclosure a few days before closing day, it is better to make an estimate of how much you will pay. This way, you have time to prepare the funds you need. To summarize, the formula to calculate the amount of cash to close is (down payment + closing costs) – deposits and credits.

When you are ready, and preferably before the closing date, you can pay using several methods. Using a cashier’s check, a certified check or a bank transfer is recommended.

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