Cash to close: What is it, how to pay it and how to avoid fraud

How much do you need to bring in to close on your home?

The term cash to close is a simple expression which hides a complex amount of financial engineering. To start, it doesn’t have a great deal to do with cash, the stuff in your wallet.

Simply put, cash to close is the amount you’ll need to bring to your closing to complete your real estate purchase.

However, you probably don’t want to bring actual cash, even if your title company is one of the few that accepts it.

Lots of paper money sets off Homeland Security questions about the source of such funds. A cashier’s check, a certified check or a wire transfer will each do just fine.

In this article:

The term “cash to close” or “funds to close” is not the same as your closing costs or your down payment.

• Your “cash to close” equals your purchase price and closing costs, minus your mortgage amount, earnest money deposit, and any credits from the seller or mortgage lender
• The term “cash to close” isn’t entirely accurate — most title companies won’t accept large amounts of actual cash. Nor can you use a personal check
• You can bring a cashier’s or certified check, or you can wire the funds from your account

Arrange for your funds a couple of days early to avoid last-minute snags.

Down payments vs cash to close

When we think about the money needed to buy a home, the usual measure is the down payment. The down payment is our skin-in-the-game. But it’s different from cash to close.

Related: How to prepare for your real estate closing

The real 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 percent. For repeat buyers, the figure was 14 percent.

Origination Charges. This is money paid to the lender for creating and underwriting the mortgage. Can include an origination fee (often 1 percent 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.

Related: Guide to mortgage closing costs (average mortgage 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 percent 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.

Related: Don' be a victim of mortgage fraud

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.

Questions about cash to close?

Cash to close is not an easy subject to master. If you have questions about a current home purchase or refinance, contact your escrow company.

If you are just starting out as a home buyer or looking into refinance rates, click the link below to shop today’s top lenders.