When closing day finally arrives, you will no doubt be excited to complete the process and get the keys to your new home as quickly as possible. In order to do so, however, you will need to pay your cash to close. Understanding what your cash to close amount is and how it’s calculated is an important step in preparing to close on your new home. In this article, we will break down the specifics of cash to close and closing costs so that you’ll know exactly what to expect when closing day arrives.
What Is the Difference Between Cash to Close and Closing Costs?
Cash to close is the total amount you’ll need to pay on closing day to finalize the purchase of your new construction home. This amount includes your closing costs, those fees specifically paid to your lender to close on your mortgage.
How Is Cash to Close Calculated?
Your cash to close amount is calculated by adding together your downpayment and closing cost amounts and subtracting any earnest money and other credits you are owed:
- Down Payment
- Closing Costs
- Earnest Money
- Other Credits
Here is a breakdown of each of these items:
A down payment is a percentage of the home’s total price that is paid upfront to the lender to secure the loan. Your down payment will likely make up a large proportion of your cash to close amount. Although mortgage insurance is required for down payments of less than 20 percent, most people put down somewhere between 5-15 percent of their home’s purchase price. Conventional loans allow for a minimum of 3 percent down payment to purchase a home, however borrowers with low credit scores or high debt-to-income ratios are required to pay more.
Government-backed mortgages, such as FHA, VA, and USDA loans, are another option for homebuyers. These are especially appealing to first-time homebuyers as they offer low down payment amounts and reduced qualification requirements.
Closing costs are fees paid to your lender in addition to the price of your home. Closing costs typically range between 2 and 5 percent of the home’s purchase price. Your lender will provide you with an estimate of your closing costs soon after you apply for a mortgage. The types and amounts of fees included in closing costs vary according to your loan type and the state you live in. Specifically, closing costs may include:
- Appraisal fee - The fee charged to have the home appraised by a third party.
- Survey fee - The fee charged to have the property professionally surveyed.
- Loan application and origination fees - The fees charged by the mortgage company to process your application and underwrite your loan.
- Title fees - The fees charged to cover the cost of reviewing, modifying, and insuring the title of the property (i.e. giving you the right to own the property).
- Prorated property taxes and homeowners’ insurance - In most cases, you will be required to pay a portion of the year’s property taxes and homeowners’ insurance as part of your closing costs.
Many new home builders are willing to negotiate closing costs and may even offer prepaid closing costs as an incentive to buy a home with them, particularly if you choose to work with their preferred lender. While this can definitely save you some money on your home purchase upfront, it’s always best to do your research and shop around for the best mortgage rates before making a decision.
Many new home builders require earnest money to be put down to secure a building contract. Your earnest money payment proves to a builder that you are serious about buying or building a new construction home with them. This allows them to move forward with construction knowing that they have secured a buyer. Typically an earnest money deposit on a new construction home is between 5 and 20 percent of the purchase price. But keep in mind that any earnest money you pay to a builder becomes part of your downpayment later on and will be credited back to you in calculating your final cash to close amount.
In some cases, you may be required to pay a deposit or other closing costs in advance of closing day. These items should then be credited back to you when calculating your cash to close amount. If you do prepay any costs earlier on in the process, be sure to keep accurate records of all payments and check that you have been correctly credited for them at closing.
What Is a Closing Disclosure?
Your closing disclosure will outline the details of your loan including your purchase price, closing costs, cash to close, loan fees, interest rate, and monthly repayments. Be sure to review all of these details very carefully before signing the closing disclosure and paying your cash to close. When reviewing your closing costs and cash to close amounts, be sure to check the following:
- Your downpayment amount is accurate
- You have been credited for any earnest money you put down
- You have been credited for any fees you prepaid
- You have been given any prepaid closing costs or other incentives promised to you by the builder
Paying Your Cash to Close Amount
You may be able to pay your cash to close amount using one of the following methods:
- Certified check
- Cashier’s check
- Personal check
- Wire transfer
Lenders differ in the forms of payment they accept, so it’s essential to ask how you can pay before closing day arrives.
Cash to close is the amount of money you are required to pay on closing day. This includes your downpayment and closing costs, less any earnest money or fees you have prepaid. Understanding how cash to close is calculated and checking your closing disclosure for accuracy are key steps in the process of buying a new construction home.
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