Understanding Cash to Close
If you've received your Closing Disclosure (CD) from your lender, you're almost finished with the homebuying process. The CD, provided at least three days before closing, outlines your final costs and means you're close to getting the keys. One key number on the CD is the "cash to close." But what is it, and how is it calculated?
Cash to Close includes your down payment and any closing costs not rolled into the loan. Closing costs are the fees required to finalize your purchase, including:
- Appraisal fees (usually paid by the buyer)
- Attorney fees for document preparation and title search
- Title insurance to protect against third-party claims on the property
- Lender application fees
- Origination fees to cover underwriting
- Mortgage insurance premiums, if applicable
- Funding fees for FHA, USDA, and VA loans, if applicable
- Pest inspection fees
These fees, listed separately on your CD, can add up to a significant amount. Your lender might allow some costs to be rolled into the loan, reducing the cash needed at closing.
Additionally, you've likely already paid earnest money (usually around $1,000) when you agreed to purchase the home. This amount, held in escrow, will be applied toward your closing costs.
Most of your cash to close comes from your down payment, which could range from 0% to 20% (or more) of the purchase price, depending on your loan. Discuss these details with your lender well in advance as part of your underwriting review.
How to Pay Closing Costs
Your lender won't expect you to bring physical cash to closing. Common methods include:
- Cashier's check: Obtain this from your bank or credit union. You'll need to know the exact amount and the payee.
- Wire transfer: Allow extra time for processing and be cautious of fraud. Always verify wire instructions with your lender.
Note: Cash, credit or debit cards, and personal checks aren't accepted for closing due to the large amounts involved. Lenders need to verify the source of funds and ensure you're not taking on additional debt to cover the amount.
By understanding the breakdown of your closing costs and preparing ahead, you can ensure a smooth, stress-free closing process.