A buyer may know the planned down payment and still be surprised by the amount needed at settlement. That happens because “down payment” and “cash to close” are not interchangeable terms.

The down payment is the portion of the purchase price you are not financing. Cash to close is the net amount you must bring to complete the transaction. It generally includes the down payment and closing costs, then accounts for money already paid and any applicable credits or adjustments.

What is included in cash to close?

The Consumer Financial Protection Bureau explains that the Estimated Cash to Close on a Loan Estimate includes the down payment and closing costs, minus items such as a deposit already paid to the seller, seller credits, and other adjustments.

Your particular calculation may include:

  • Your down payment
  • Lender, appraisal, and other loan-related charges
  • Title, settlement, recording, and government charges
  • Prepaid interest
  • Homeowners insurance premiums
  • Initial property-tax and insurance escrow deposits
  • Property-tax, association-dues, or other settlement adjustments
  • Credits and deposits that reduce the amount due at closing

Closing costs vary with the home price, location, loan, lender, services selected, insurance, taxes, and timing. The CFPB offers a broad planning range of 2% to 5% of the purchase price for closing costs excluding the down payment, but a personalized estimate is more useful than applying that range to every transaction.

Your earnest-money deposit usually is not an extra charge

Earnest money is typically paid after the seller accepts the contract. If the transaction closes and the deposit is handled as expected under the contract, it is generally credited toward the amount the buyer owes at settlement.

For example, a buyer who ultimately needs $30,000 for the down payment and costs and has already deposited $5,000 may have a remaining cash-to-close amount of approximately $25,000, before any other credits or adjustments. This is only an illustration; the settlement statement controls the actual calculation.

Seller credits can reduce closing costs

A purchase contract may require the seller to contribute toward eligible buyer closing costs. The allowed amount and eligible uses depend on the loan program, occupancy, down payment, contract, and transaction details.

A seller credit normally does not replace a required down payment, and unused credit generally is not handed to the buyer as cash. The credit should be structured around documented eligible costs and reviewed before the offer is written.

Lender credits involve a tradeoff

A lender credit can offset some upfront closing costs. According to the CFPB, lender credits are typically associated with a higher interest rate than the borrower otherwise would have received.

That tradeoff may or may not fit a buyer’s plans. Compare both the upfront savings and the longer-term payment impact rather than judging the option only by the amount due at closing.

Why the number can change before closing

The first Loan Estimate is based on information available early in the process. The final amount can change when the property, closing date, insurance, taxes, loan terms, services, or contract credits become final. Some costs are subject to legal tolerance limits, while others may change under permitted circumstances.

For most covered mortgages, the Closing Disclosure must be provided at least three business days before closing. Compare it with the most recent Loan Estimate and ask about unexpected differences promptly.

The funds must also be documented

Having enough money is only part of the requirement. The lender also needs to verify acceptable sources of funds. Bank statements, investment statements, gift documentation, deposit records, and explanations for recent large deposits may be requested.

Avoid moving money between accounts or making undocumented deposits without discussing the documentation impact with your loan officer. Wire instructions should always be independently verified with the settlement company using trusted contact information because real estate wire fraud can cause severe losses.

Do not spend every available dollar on the transaction

The maximum down payment you can make is not necessarily the most practical down payment. Buyers may also need funds for moving, repairs, furnishings, utility deposits, and an emergency reserve. CFPB guidance specifically recommends setting aside money for initial home expenses when deciding how much cash to commit.

A five-number budget to request before shopping

  1. Estimated down payment
  2. Estimated closing costs and prepaid expenses
  3. Deposit due when the contract is accepted
  4. Estimated cash to close after credits and deposits
  5. Recommended funds remaining after closing

Reviewing those numbers alongside your payment estimate creates a more useful shopping budget. You can also explore Dan’s payment calculator and learn why the work behind a mortgage preapprovalmatters before making an offer.

Know the payment and the cash before you shop

Dan Flavin’s Path 2 Buy process reviews the estimated payment, cash to close, approval, and next steps before house hunting.

Call Dan at 410.935.3528

Sources

This article is for general educational purposes and is not legal, tax, credit, or individualized financial advice. Costs, credits, documentation, program availability, and eligibility requirements vary. All loans are subject to approval. Equal Housing Lender.