Understanding Cash to Close When Purchasing A Home
Buyer Tips · Raleigh Metro
Understanding Cash to Close When Purchasing A Home
Cash to close is the total amount you need to bring to the closing table — your down payment, closing costs, and prepaid expenses, minus any credits or deposits you've already paid. Here's what it means and how to prepare for it.
Even before starting your home-buying journey, you're probably already aware that the numbers aren't just about the home's purchase price and your down payment. There are dozens of smaller fees, expenses, credits, and adjustments in a real estate transaction that you need to account for. This is where the term "cash to close" comes into play — the amount you need to bring on closing day to finalize the sale, and a crucial part of the home-buying process.
What Is Cash to Close?
Cash to close, also known as funds to close, is the total amount of money a home buyer needs to bring to the closing table to finalize a real estate purchase. You can think of it as the grand total you'll need to pay on closing day to officially become a homeowner.
The funds typically include your down payment and closing costs, prepaid expenses such as property taxes and homeowners' insurance, and any escrow deposits you've made to set up your mortgage account. On the other hand, any credits you've already paid will be subtracted from your total.
Knowing your cash to close in advance is crucial because you need to prepare the necessary funds at closing. You'll find the exact amount you owe on your Closing Disclosure in the section labeled "Calculating Cash to Close," which your mortgage lender should provide at least three business days before closing. This document itemizes all your closing costs and gives you a detailed breakdown of how your total amount was reached, and how it differs from the estimate you received at the start of the mortgage process.
Closing Costs vs. Cash to Close
As you go through your home-buying journey, you'll often encounter the terms "closing costs" and "cash to close." Here's the difference between the two.
Closing costs are the fees you pay to your mortgage company to close on a house and transfer legal ownership into your name. In most markets, closing costs add up to about 2% to 5% of the home's purchase price. Things like title insurance, appraisal, escrow services, and lender's underwriting and origination fees are all costs needed to complete the real estate transaction.
Cash to close refers to the total amount — including closing costs — you need at closing to complete the home sale. It also includes your down payment, then subtracts any fees and earnest money deposit you might have paid when your offer was accepted, along with any seller credits and any refunds for overpayments.
To put it simply, closing costs are just one part of your cash to close, and the two terms are not to be used interchangeably.
What Makes Up Your Cash to Close
Your cash to close is made up of several parts, and understanding each item helps you see where your money is going and where you can find a little savings. Here's what typically makes up the total:
- Down payment — usually the largest share of your total cash to close. For conventional loans, it's anywhere from 3% to 20% of the total home cost, while FHA loans can be as low as 3.5%. Some VA or USDA loans allow eligible buyers to purchase with zero down payment.
- Closing costs — one-time fees typically totaling between 2% and 5% of the home's purchase price, including the appraisal fee, loan origination fee, title search and title insurance, transfer taxes, credit report fee, recording fees, attorney fees (in some states), and HOA fees where applicable.
- Prepaid expenses — costs like prorated property taxes, the first year of homeowners' insurance, mortgage interest, and HOA fees, usually held in escrow until the applicable payments are made.
- Deposits and credits — money you've already put toward the purchase, plus any credits from the seller or lender, which show up as deductions to your total.
The Cash to Close Formula
To figure out or estimate your cash to close amount, here's a simple equation most lenders use:
Cash to Close = Down payment + Closing costs + Prepaid expenses – Credits and deposits
Aside from your down payment and closing costs, understanding your estimated cash to close and everything it entails is a key part of your home-buying journey. Staying on top of these details is crucial so you won't be caught off guard when you receive your closing disclosure and see the amount you owe on closing day.
Want help estimating your cash to close?
Ample preparation makes your home-buying journey smoother and easier. I'll help you estimate your cash to close before you make an offer, so there are no surprises on closing day.
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