How much should you bring in to close on your home?
The term “Cash To Close” is an expression which actually hides a complex amount of financial engineering. To start, it doesn’t have a great deal to do with cash.
Simply put, cash to close is the amount you’ll need to bring to your closing to complete your real estate purchase.
But you probably don’t want to bring actual cash, even if your title company is one of the very few that accepts it.
Lots of paper currency sets off Homeland Security questions about the source of funds like that. A cashier’s check, a certified check or a wire transfer is honestly what you’re going to want to do.
Down Payments vs. Cash To Close
When you think about the money needed to buy a home, just think that the usual measure is the down payment. The down payment is your “skin-in-the-game.” But it is different from cash to close.
The actual amount needed to close is the down payment plus all settlement costs, minus your earnest money deposit and any credits from the lender, seller or other parties. You can find this figure on page 1 of the Closing Disclosure form (CD) given to you by the lender. You can also see the lender’s calculations by looking at pages two and three.
Additions & Subtractions
It really does take two pages to calculate the cost to close. That’s because a real estate transaction can involve a lot of costs – and a lot of credits. Here are some of the big items to consider.
The down payment. Often, the biggest single expense paid by purchasers. According to the National Association of Realtors, in 2016, the typical down payment for a first-time buyer was 6%. For repeat buyers, the figure was 14%.
Origination Charges. This is money paid to the lender for creating and underwriting the mortgage. Can include an origination fee (often roughly 2% of the loan amount) as well as discount points, tax service and a flood certificate. Importantly, if you agree to a higher interest rate, the lender may give you a credit to offset closing costs.
Closing Services. This includes the escrow agent’s fees, title insurance, etc. In a buyer’s market, a purchaser may be able to get a seller credit to cover some or all of these costs.
Taxes. Governments love real estate transfers and refinancing. In a sale situation, taxes may be split between buyer and seller, or paid by one or the other, according to their purchase agreement.
Prepaid items. Not a cost of financing but a cost of homeownership. If you buy with less than 20% down, the lender will usually establish an escrow (trust) account. This account is used to make sure such things as property insurance and property taxes are paid. The lender will collect money up-front to establish the account.
Read this BEFORE making a wire transfer
The use of wire transfers to move money for real estate transactions is entirely common. It’s also a growing opportunity for abuse.
With fraud, the buyers receive an email with wiring instructions which look entirely legitimate. Unfortunately, the account number has been changed. This results in the transfer of money to a far and distant bank account. Once sent, the money is virtually impossible to get back.
If you need to make a wire transfer, contact your closing agent and confirm that the recipient account number and related information are correct. Here’s why. The federal government arrested 74 people in June 2018 for allegedly hijacking wire transfers, including those involving real estate transactions.
These criminals say the government, “exploit individual victims – often real estate purchasers, the elderly, and others – by convincing them to make wire transfers to bank accounts controlled by the criminals.” According to the Justice Department, some $3.7 billion has been lost through wire fraud.
*This article does not represent legal interpretation or advice. This is not a commitment to make a loan. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over life of loan. Reduction in payments may reflect longer loan term. Terms of the loan may be subject to payment of points and fees by the applicant. Seattle Mortgage Brokers, LLC NMLS: LO# 305371/1598279 | MB# 761615