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Understanding “Cash to Close”

August 22, 2022 derekevansteam

If you’ve ever wondered how much money you’ll actually need to buy a home, this is the article for you.
“Cash to Close” consists of two things: your down payment and your closing costs. Here is what you
should know.

Down Payment

Your down payment is the part of your home purchase that is not being financed. For example, if you
are purchasing a $400,000 home with 5% down, you will need $20,000 for your down payment. Here at
Fairway we offer loan programs with as little as 0% down (contact us for more info!). Whatever your
down payment, you will also have closing costs, which we will outline next.

Closing Costs

Closing costs consist of lender fees, title fees, and pre-paid items. Let’s look at each one:

Lender fees

Also called origination charges, these are the fees that the lender charges to originate and fund your
loan. This could include an application fee, processing fee, underwriting fee, doc fee, and/or origination
fee. It will also include any discount points used to buy down your interest rate.

Title fees

Title service fees include the title search fee, the premium for the lender's title insurance policy, and
other costs and services associated with issuing title insurance. In most states, the fee for conducting
your closing is also a part of the title service fees.

Prepaid expenses

Prepaid expenses or items — also called prepaids — are collected up front so that the lender can pay
them on your behalf. These include 12 months of homeowners insurance and the collection of property
taxes and homeowner’s insurance that will make up your escrow account. Lenders will collect enough to
pay out the next disbursement and typically collect 2 months of additional reserves for the escrow
account. Also included is private mortgage insurance premium, if required.

What about items Paid outside of closing?

Some items are paid for up front, like appraisal and credit report fees. These are marked as “POC” or
paid outside of closing on your closing disclosure and are subtracted from the cash to close calculation.

What happens to my Earnest Money Deposit?

Your earnest money deposit (EMD) is the money that you put down to show good faith to the seller at
the time you enter contract. Just like POC items, EMD is deducted from your total cash to close to
calculate the amount of money you’ll need to bring to closing.

Rule of Thumb

A simple rule of thumb is that you should expect cash to close to cost about 2 to 5 percent of the home’s
price. Check with your lender for an estimate before you go under contract to ensure you’re
comfortable with the amount of money you’ll bring to the closing table. Need a pre approval? Let us help!