Cash To Close, Beware, It’s More Than Just Your Down Payment!

Have you been thinking about buying a home? Maybe you have even started the homebuying process? There is one thing you are probably beginning to realize. The real estate industry uses its own vocabulary! A vocabulary of terms and acronyms tossed around as if people from all walks of life use them everyday.  Earnest money, discount points, closing disclosure, DTI, VOE, LTV… feeling confused? You are not alone! What about cash to close?  Sounds easy enough, right? Your down payment? Sadly no, even this term is not that simple. Join me today as I continue my real estate vocabulary series by breaking down cash to close.  What is cash to close?  What are the 3 components of cash to close? How to find out how much you need, and how and where you need to present your cash to close.

Cash to Close

What exactly is cash to close?  Cash to close is also referred to as funds to close, or closing funds. This is the final amount of money that is required from a buyer, in order to complete the purchase of buying a home. Many buyers believe this is the required amount of their down payment based on their loan program.  This is only a partially a correct answer. The down payment is only one of three components of the cash to close requirement.  
There are three components that make up cash to close.  These components are the down payment, the closing costs also known as closing fees, and the buyer’s pre-paid requirements. To break these down even further…

Component 1 – The Down Payment

The down payment is the percentage of the purchase price that your loan requires you to pay upfront at closing.  This amount varies by the type of loan you are getting. Moat loans require 3.5% to 20% of the purchase price.  This amount is the most common thing people begin saving for when they have decided to buy a home. Certain loans, such as the VA Loan and the USDA loan do not require any percentage down.  

Component 2 – Closing Costs or Closing Fees

Closing costs are the fees that accrue while processing your loan.  These fees are paid at closing to many different companies. Your lender, the title company, the county recorder, the appraiser, and the credit reporting agency to name a few.  These fees vary by loan program, purchase price, loan amount, and your interest rate.  The figures typically calculate to 2-4% of your purchase price.

The Third and Last Component – Pre-paids

At closing, the lender requires the upfront payment of the 1st year of insurance on your home.  They also collect a small amount of pre-paid interest on your loan. A per diem basis of property taxes will also be collected if your seller pre-paid property taxes past the day you take possession of the home.  

If your down payment is less than 20% of the purchase price, your lender will require an escrow account be set up.  The escrow account is managed by your lender. The lender will collect taxes and insurance out of your monthly mortgage payment.  These amounts will then be held in the escrow account. As your home’s property tax and insurance bills become due, the Lender will make these payments out of this account.  

To set this account up, the lender will collect 2-3 months of insurance. They will also collect a number of months of taxes. The amount of property taxes will vary. (It depends on the state you live in, as well as the month in the year, that you close.)  The component of pre-paids are typically about 1/2 to 1% of your purchase price.  

How Much Cash to Close is Needed?

In General…

Once we add all three components together, Closing funds average between 6% – 25% of your purchase price.  The most common is 6-9%.  To provide an example. If you purchase a home for $466,000 (the current home median value here in Yamhill County, as of May 31, 2022), you will need about $28,000-$42,000 in cash to close. (6-9%.)  

Things to know about needed funds…

In most cases, lenders will require these funds to be “seasoned”. Meaning they must be in your savings account at least 2 months prior to closing on your purchase.  There are options to have a family member gift some of these monies to you. There are also some grants that can assist with these funds.  Both cases require you to be in close contact with your lender. Your lender can advise you on the requirements for both and required steps needed, to go either of these routes.

Get Pre-Approved to Obtain a More Precise Figure

The best option to know a more precise amount to save, is to talk with a lender and get pre-approved. I would suggest reading my article, 10 MUST KNOW Tips When Preparing to Buy. The article provides steps of how to become prepared to enter the home buying market. It also gives tips of how to prepare to apply with a lender. Once you have found a lender and have applied for a pre-approval, they will provide you with a Loan Estimate. This is a 3 page document. The loan estimate breaks down every estimated cost and credit line by line. The final line item is titled “cash to close”, reflecting the anticipated amount you will need.

How and Where To Present Your Cash to Close

Lender and the Closing Disclosure

After you find a home and go under contract with a Seller, your lender will adjust these figures. They will update your exact purchase price, loan amount, property taxes for that particular home and your rate.  Three days prior to closing on your purchase, you will receive the final Closing Disclosure. This is also known as the CD, and will come from your lender.  This document will reflect many things. Your locked-in rate, loan amount, monthly payment, all costs and credits of the transaction and the final amount of cash to close.  This figure will account for the earnest money you already deposited with the title company. 

The Title Company

The title company will call you to coordinate a time to sign the last of your loan and purchase documents.  They will confirm the cash to close amount and advise to bring in a Cashier’s check at signing. They can also provide wire instructions. Wiring versus a check, allows funds to transfer electronically from your account to your purchase with them, as another option.  Make note of the mentioned, “cashiers check or wired funds”.  You will NOT be able to write a check out of your account for your cash to close.  The title company does require one of the two accepted forms of guaranteed funds. This will, many times, require a trip to your bank.

Make note, if your money is coming from mutual funds, a bank online or out of state. You will need to touch base in advance with them, to verify your funds can be transferable within 24 hours of receiving the final figure from the title company. Each company will have different steps you will need to take to make that happen.  Also note, funds held in mutual funds or stocks may take multiple days to cash out to become liquid. You will want to account for this in advance, to not create any form of a delay in closing.

There we have it, all things cash to close, the what, the how much and the how. If you found this helpful, check out my article What an earnest money deposit is. I break down everything earnest money and the due diligence period during your purchase.