What Is Cash to Close to Borrower?

“Cash to close” is the total amount a borrower must provide at the closing table to finalize a real estate transaction, whether for a home purchase or a refinance. Comprehending this figure is fundamental for effective financial planning, as it encompasses various expenses beyond the property’s price.

Components of Cash to Close

The total cash needed at closing is typically comprised of three primary categories: the down payment, closing costs, and prepaid expenses. These elements collectively determine the final sum necessary to complete the transaction.

The down payment is the initial equity a borrower contributes toward the home’s purchase price, reducing the amount financed through a mortgage. While the median down payment for all homebuyers is around 18%, first-time buyers often put down less, with a median of 9%. Down payments can range from as low as 3% for conventional loans, or even 0% for certain government-backed loans like VA or USDA loans, up to 20% or more.

Closing costs represent a broad category of fees charged by various parties involved in the mortgage and property transfer process. These are distinct from the down payment and cover the administrative and legal aspects of the transaction. Typically, closing costs range from 2% to 5% of the total loan amount or purchase price. These fees can vary significantly based on the loan type, the property’s location, and the specific service providers involved.

Prepaid expenses are costs paid in advance, covering future obligations related to homeownership. Unlike closing costs, which are fees for services, prepaid expenses cover initial payments for ongoing costs. These often include amounts for property taxes, homeowners insurance premiums, and sometimes mortgage interest or homeowners association (HOA) fees. Lenders often require a certain number of months of these expenses to be paid upfront and held in an escrow account to ensure continuity of coverage and payments.

Understanding Specific Closing Costs

Within the broad category of closing costs, numerous individual line items contribute to the total amount. These can be grouped into fees charged by the mortgage lender, fees for third-party services, and fees related to the escrow or title process.

Lender fees are charges imposed by the mortgage lender for processing and underwriting the loan. The loan origination fee, which typically ranges from 0.5% to 1% of the loan amount, covers the lender’s administrative costs. Other fees may include an underwriting fee (generally between $300 and $750) for evaluating the loan application, a processing fee (which can range from $300 to $900), and an application fee (often between $200 and $500). Borrowers might also pay discount points to lower their interest rate.

Third-party service fees are paid to external professionals and entities involved in the transaction. These include an appraisal fee ($300-$550) for property valuation and a credit report fee ($35-$50) for the borrower’s credit history.

Title insurance protects both the lender and the owner against defects in the property’s title. Attorney fees ($500-$1,500) may apply where legally required or chosen. Additional charges may include a survey fee to verify property boundaries and recording fees paid to the local government.

How the Final Amount is Communicated

The precise amount of cash to close is formally communicated to the borrower through specific legal documents issued by the lender. It is crucial for borrowers to carefully examine these forms for accuracy and to compare them against previous estimates.

The first official document a borrower receives is the Loan Estimate (LE), typically within three business days of applying for a mortgage. This form provides an initial estimate of the loan terms, projected payments, and estimated closing costs. It helps borrowers compare offers from different lenders and gain an early understanding of their potential financial obligations.

As the loan process progresses toward closing, the borrower receives the Closing Disclosure (CD), detailing the final loan terms and all associated costs. Lenders are legally required to provide the Closing Disclosure at least three business days before the scheduled closing date. This allows borrowers to thoroughly examine the final figures and compare them against their initial Loan Estimate. Any significant discrepancies or unfamiliar charges should be promptly discussed with the lender or settlement agent before signing.

Making the Payment

Once the final cash to close amount is confirmed, the borrower must arrange for the funds to be transferred to the appropriate party. Personal checks and cash are generally not accepted for large sums at closing.

The most common and accepted methods for paying the cash to close are wire transfers or certified/cashier’s checks. A wire transfer provides a direct electronic movement of funds from the borrower’s bank account to the closing agent’s account. Certified or cashier’s checks are checks guaranteed by the issuing bank. It is important to confirm with the closing agent which specific method is preferred or required.

Borrowers are advised to arrange their payment well in advance of the closing date. For wire transfers, this means initiating the transfer at least one to two business days prior to closing to ensure the funds clear and are received on time. The funds are typically paid directly to the escrow or title company, which acts as a neutral third party to manage the financial aspects of the transaction.