Understanding Cash To Close

Before you head to closing, learn what costs you may need to pay and how to pay for them.

Closing Costs

Closing costs are one-time fees paid to the lender that will be funding the loan or other 3rd parties associated with the deal.

Closing costs may include:

• Application fees
• Underwriting fees
• Appraisal fees
• Mortgage insurance premium
• Title insurance
• Escrow fees
• Notary fees
• Transfer taxes

Pre-Paid Items

Pre-paids are NOT closing costs. These are items that are required to either be prorated or paid in the future. A clue lies within the name itself, but these items are simply being PRE-PAID in advance. In some cases, the prepaid items associated with a transaction can overshadow the cost of 1-time closing costs and at first glance shock a borrower into thinking they are overpaying for a loan.

Pre-paid items often include:

• Hazard Insurance premium
• Prorated interest on the new loan
• Establishment of the escrow (aka impound) account

Not all prepaid items are required on all loans. Ask your loan officer about the ability to waive certain things like the establishment of the escrow account.
NOTE!! These items eventually become due and you are only kicking the can down the road. The bill will have to be paid at one time or another.

Closing costs are about 3% - 6% of your home's purchase price, on average, and some closing costs can be rolled into the loan. Cash to close does not include any of those costs.

Down Payment

One of the most important costs in your cash to close will be the down payment. A down payment is a percentage of the purchase price that you pay upfront, lowering the amount you have to borrow and contributing to the home equity you start out with.
Depending on the type of loan, there is a minimum down payment you must pay. For an FHA loan, that minimum is 3.5%. For a conventional loan, it's 3%. Certain government-backed loans, like the VA loan or USDA loan, do not require a down payment.

How much you pay above the minimum may be determined by your specific lending situation and/or you will have several options to consider from your loan officer. Just remember, the more you pay, the less you borrow and the more equity you'll have. A 20% down payment is recommended to avoid paying mortgage insurance.

Deposits And Credits

While most costs add to your cash to close total, some may also be deducted from it.

For example, your earnest money deposit may be subtracted from the total, along with any closing costs you pay before closing (credit report or appraisal). If you've already paid your down payment, that will be deducted from your cash to close, too. If you have any seller credits (costs the seller has agreed to pay), they will be subtracted from your cash to close as well. You also may be eligible for lender credits, based on your chosen interest rate, which are also deducted from your cash to close.

Just make sure to keep a record of all of the credits and payments you make before closing, in case there are any errors on your closing disclosure you may have to dispute.

Thanks to an initial loan estimate you’ll have an estimated idea of just how much money you’ll need to bring to the table for your mortgage closing.  A final closing disclosure will be provided at least 3 days before closing, and will contain the finalized dollar amount needed to satisfy the closing costs required to close your mortgage loan.