What is it, how to pay it, and how to avoid fraud

What is it?

The terms “cash to close” and “funds to close” are NOT the same as your closing costs or your down payment. Many borrowers are surprised to find out that the funds due at close are more than they anticipated, because they were only thinking of the down payment portion.

  • The borrower’s true “funds to close” equals the purchase price and closing costs, minus the mortgage amount, earnest money deposit, and any credits from the seller or mortgage lender
  • The term “cash to close” isn’t really true — title companies won’t accept large amounts of actual cash and you can’t use a personal check
  • You can bring a cashier’s or certified check, or you can wire the funds from your account

It’s a good idea to arrange for the transfer of your closing funds a couple of days early to avoid last-minute snags.

You can find out more here from Peter Miller’s article at The Mortgage Reports.

How much do you need?

Well, that all depends on the transaction. Your initial Loan Estimate that is provided by your lender will give you a good idea of what will be required at closing. The Closing Document provided near the end of the transaction should be very close to the final dollar figure, as well.

Down payments and cash to close

When we think about the money needed to buy a home, what comes to mind first is the down payment. The down payment is the buyer’s intended percentage of ownership, versus the lender’s share. With that said, it’s different from cash to close.

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

Believe it or not, 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 sometimes a lot of credits. Here are some of the big items to consider, per Miller:

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.

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.

Pre-paids. 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.

Be Careful – Wire Fraud

Miller also highlights another key issue – wire fraud.

“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.

If you need to make a wire transfer, CALL 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.”