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The home-buying process gets complicated quickly. From wire transfers and mortgage lenders to origination fees and private mortgage insurance (PMI), there can be a seemingly endless to-do list standing between you and your dream home.
This article will help you move forward. It focuses on the important distinction of cash to close vs down payment to help you understand the terms and how they relate to your obligations as a home buyer. Let’s get started.
Cash to close includes everything the homebuyer needs to pay before finalizing the purchase of their new property. As the phrase implies, it’s literally the amount of cash you must pay to close the deal.
There are various origination fees, appraisal fees, and other upfront costs you’ll need to add together to calculate your full cash-to-close amount. We take a closer look at some of these costs below.
The first part of your cash-to-close bill includes any fees you incur while applying for a mortgage and putting in an offer on a home. Examples include:
Your down payment is also part of your total cash to close. It’s the initial lump sum payment you make when buying a home. Buyers are commonly told to put down 20% of the home’s total purchase price. But you may be able to put down as little as 5% through a special down payment for first-time homebuyers. Keep in mind, however, that making the minimum home down payment will increase your borrowing costs.
The amount you put down on your new home will have an impact on everything from the loan estimate you receive to whether you need PMI. The larger your down payment, the less you need to borrow to purchase your home.
Down payments can also impact your cost to close because some fees are charged as a percentage of the total loan amount. For example, loan origination fees are often between 0.5% and 1% of the amount you borrow, which varies based on your down payment.
Your credit score can also influence how large of a down payment you need. People with lower scores may be approved to borrow less money to buy a home. You can overcome this by improving your credit score or by putting down a larger amount of money upfront.
Your lender may also ask you to pay different prepaid costs before releasing your mortgage funds. These are usually outlined in your loan estimate document.
Some common expenses in this category include:
Depending on your mortgage originator, you may need to pay these closing costs of a house before making your down payment.
Seller and lender credits are two additional factors to keep in mind when you calculate home-buying costs. But they can reduce your price to close — not add to it.
A seller credit is a payment by the previous homeowner toward expenses that would usually be your responsibility as the buyer. Seller closing costs may be negotiated as part of your deal. Sellers sometimes offer them to reduce closing costs for buyers and, therefore, convince them to purchase.
Lender credits are similar, but they come from your mortgage company instead of the buyer. However, if a mortgage company offers lender credits, it may increase your interest rate on the loan. You can review your closing disclosure to see if your lender offers any credits.
How To Estimate Cash to Close for a Real Estate Transaction
As a general rule of thumb, you can expect to pay between 3% and 6% of your home’s total price in closing costs. Your costs ultimately depend on the lender you choose, your down payment amount, and whether the seller helps you pay some of the charges.
If the cash to close you think you’ll need is not in your budget, you have a few options. One is to approach multiple mortgage companies to see which offers you the best deal. You can also negotiate fees with lenders to see if they might offer a discount to persuade you to choose their institution for your home loan.
Another option is reaching out to the seller and asking them to offer seller credits as part of your agreement. This won’t always work, but it can — especially when the seller is motivated to move on from their property quickly.
You typically pay your total cash to close costs on closing day when you meet with the attorney arranging the deal. You may be able to pay with a personal check, but it’s more common to pay with a cashier’s check, certified check, or wire transfer.
Your real estate agent and attorney will tell you the exact amount you owe and how they want you to pay it when the time comes. But it’s a good idea to start estimating these costs and budgeting for them early on in your home-buying journey.
As long as you send sufficient funds, after a few business days you’ll officially own your new home.
The easiest way to think about cash to close vs down payment is that your down payment is a part of your total cash-to-close costs. But there are so many different costs to keep in mind throughout this process that it’s easy to get confused. That’s why it’s important to choose a mortgage company that has your back.
At Fidelity Bank, we’ve had our borrowers’ backs for more than 150 years. We specialize in helping average people fulfill their dreams of homeownership and we can do the same for you, whether you’re buying your first home or need some assistance with property taxes.
But don’t just take our word for it. See what we can do for you and your home-buying journey. We may be able to make the entire process easier for you.
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