Introduction
Owning a home can be complicated, especially if you intend to finance the purchase with a mortgage loan. The cash to close concept and the processes of purchasing a home are considered complex and many people find it difficult to navigate. While there are existing documents that are available to guide you through the entire process of acquiring a home, it still remains ironical that many people find the whole process exhausting. This is probably not unconnected to the fact that many buyers and sometimes, sellers, are not familiar with the basic terms that cover the entire details needed for the purchase of a home. This article explains in details the basic idea behind cash to close and other associated terms.
Calculating your Total Cash to Close
What is Cash to Close?
Cash to close is the amount needed by a home buyer to close the purchase of a real estate. This does not necessarily have to do with physical cash. You are however allowed to wire funds straight from your account. The use of certified check is also allowed and used to close down payment for a home. Cash to close also include the down payment and other related costs to the mortgage loan. The cash to close is usually on the first page of the Closing Disclosure (CD) form issued by the lender. The cash to close includes certain amount for closing costs such as the title insurance as well as the attorney fees.
Closing Cost Fees
Below are some of the payments made over a property in a transaction that has to do with real estate. These fees might be a bit complicated for those who have little or no knowledge of real estate transactions. Some of the closing cost fees include:
Attorney Fee
This is the fee that you are charged by an attorney for the review of the application of your home purchase as well as the necessary contracts and agreements that are to be signed. You do not want to get involved in a mortgage process without the guidance of your attorney.
Courier Fee
In situations where contract papers are to be signed, there might be a need for you to pay courier fee, for swift delivery of the documents. Though, you might not get to pay any courier fee if the entire process of closing is virtually done.
Homeowners’ Association Transfer Fee
This is the fee paid by the new owner of a home, in a well planned neighborhood. This payment is meant to cover for change of ownership. It is important that you ensure that the seller provides you with details of the HOA dues as well as records of financial statement, as well as minutes. You also have to ensure that you get to read the rules and regulations guiding the conduct of the occupants of the neighborhood before committing yourself to its purchase. This is necessary so as to help you make an informed decision on whether you still want to go ahead with the purchase or not.
Appraisal Fee
Appraising a property is very important as it helps in providing necessary details to the lender on what to commit to the borrower. The appraisal fee is usually paid to a property agency that goes ahead to make an assessment of the value-worth of the property. It is when the appraisal is completed that the lender can proceed with the issuance of the mortgage loan. In making appraisal, several factors are taken into consideration and they include the location of the property, the size, the physical state of the property as well as the level of repairs or damages that have been done on the house.
Survey Fee
Often times, lenders always insist that a potential buyer of a home gets a property survey before the mortgage loan can be approved. The survey fee is charged by the survey company. The company ensures that proper lines and the exact parcel of land are well determined.
Title Search Fee
This fee refers to the charges made by the title company to identify if there are any sort of loopholes about the property in the public property records. This identification would also point out if there are any disputes over the property.
Private Mortgage Insurance (PMI)
This type of mortgage insurance provides cover for the lender. This can be in a case that the borrower refuses or cannot pay up the mortgage loan. When you have a conventional loan and you make a down payment which is less than 20%, private mortgage insurance will be needed. The payment of this PMI can be done through a monthly premium, up-front premium or via up-front and monthly premiums.
Tax Service Fee
This payment is collected by a lender and passed on to the tax service agency, who keeps an eye on the tax payments you make on your property. The tax service agency determines the fee and they also see it to that the property is free from any form of tax infractions.
Calculating your Total Cash to Close
The Closing Disclosure contains all that is needed for you to pay. This document will be received three days prior to the closing period. It is also very important to do a critical analysis with your mortgage lender on what your closing costs would be. Your total cash to close is your down payments added to your closing costs, subtracted from any credits received from the seller. Most times, the payments of the closing costs are paid into an escrow account.
Escrow Account
This refers to the account that holds funds meant for parties involved in a contractual arrangement. The escrow account is managed by an agent, who holds the funds or assets for them. These funds and assets are actually released by the agent based on given instructions. Again, these funds or assets could also be released if the contractual obligations, which were initially agreed on, have been met by parties involved in the contractual arrangement.
The escrow account is mostly used in the real estate business. It could also be used in other business arrangement involving the transfer of funds or assets from one party to another. The use of an escrow account also gives the seller an assurance that the buyer will be able to close the purchase. In real estate business, the fund in the escrow account is transferred to the seller as soon as all necessary obligations for the sale are satisfied.
Cash to Close Fees
Below are some of the basic cash to close fees:
Origination charges
This is the fee, a lender charge in advance, to set up a loan. This origination charge is sometimes divided into an underwriting fee and a processing fee. The underwriting fee is the charges that cater for vetting and screening of applications, in a bid to determine its eligibility. On the other hand, the processing fee refers to the charges that cover the documentation of your application. However, some other lenders take both the underwriting and processing charges as a single fee. Charges are usually made based on the percentage of the loan amount and this mostly falls between the range of 0.5% and 1.0%. It is assumed that the origination charges are meant to cater for the miscellaneous expenses of the lender. Though, origination charges could sometimes be paid along with other fees. It is however possible to see advertised loans with stipulated origination charges clearly stated.
Down payments
This is just a part-payment of the selling price of a home that is paid in advance. This part-payment is not made available by a lender, through any type of loan. It is however important to note that the basic down payment is dependent on the lender, the kind of mortgage and of course, the funds at your disposal. The down payment is considered as a form of commitment to lay ownership to the house, while the lender takes care of the remaining payment.
These down payments are considered important by the lenders; except for government financed loans that most times, do not require making any form of down payments. The minimum down payments differs but making a down payment of at least 20% on a home will boost the possibility of securing a proper mortgage. The credit history of the borrower is also pivotal to the form of requirements that would be demanded.
Prepaid items
This is also known as prepaid expenses. They are basic payments made in advance to make payments for the first month’s interest on the loan, prior to the period a lender begins charging the buyer. These payments are also used to finance the escrow account. Prepaid items entail hazard insurance and other expenses from assessment. There are different types of prepaid items. They include mortgage interest. This is also known as the per diem interest that arises between the closing date and the end of the month; property taxes on real estate paid into an escrow account and insurance premium paid by homeowners into an escrow account. They are also shown as “Items Required by Lender to be Paid in Advance” and “Reserves Deposited with Lender” on a settlement statement. There is however a striking similarity between prepaid items and escrow accounts.
Taxes
In real estate situations, they are considered as pro-rated taxes which could be divided between the seller and the buyer. This is simply because they expire at different times of the year. It is important to also note that these taxes differ by states. In some states, for instance, if you are meant to pay up your taxes by December and you close in by September, it is calculated that you have 3 months to pay for. On the other hand, the seller would be expected to pay taxes for the other 9 months. In other words, you are basically paying for only the period you command ownership of the home, in a particular year and consequently, further payments of the taxes are done via an escrow account. Most times, these taxes are paid depending on the number of days of owning the home.
Paying Your Cash to Close
The payment of your cash to close can be done via different means. Below are some of the ways means, through which your cash to close can be paid.
Certified Check
A certified check is said to be a private check that has the backing of the check owner’s bank. The rationale behind this is to ensure that proper verification of the signature of the check owner is properly done; while also ensuring that the owner has enough money to pay. The bank then withholds the amount of check until it is deposited or cashed. The certified check guarantees the lender that you have what it takes to pay up your obligations.
There are real estate cases that lenders are reluctant to take personal checks from buyers. This is owing to fears of thee checks bouncing. In such situations, a certified check brings a reduction in the risk. However, it is important to note that sellers are advised to make confirmations about certified checks from their banks as soon as they receive it. This has to be done so as to avoid stories of illegitimacy. The certified check is also called an ‘official check’ in some financial institutions.
Credit or Debit Card
Most times, before trying to approve your loans, lenders want the certainty that you have enough funds to pay back. In this situation, you can use your credit card to borrow cash, probably from your financial institution. Credit cards are usually given out by financial institutions to their customers and they give exclusive privileges to card owners to borrow funds from them. These borrowed funds are however expected to be paid back with interest based on specified terms and conditions of the financial institution.
Basically, credit cards are usually given out in four different categories which include charge cards, standard cards, reward cards as well as secured credit cards. On the other hand, payments are directly withdrawn from a debit card belonging to the buyer. It is important to note here that payments are not withdrawn through loans in banks using debit cards. Generally, there are two types of debit cards, and of course a standard type. They include prepaid debit cards; electronic benefits transfer cards, as well as standard debit cards.
Personal Check
The use of a personal check might be risky for lenders. This is because there is a very high chance that the check might bounce. A personal check is just a paper that documents the amount of money to be paid out, as well as the full name of the recipient of the money. The personal check is more or less like a promissory note that assures the lender that the money will be intact whenever the recipient decides to redeem it.
And it is important to note that when a check bounces, it takes a lot while for it to be rectified. This is why most lenders do not accept it as a mode of payment but rather prefer other alternatives. Although, a big advantage of using a personal check is that you avoid the payment of convenience fee. Most property owners always make charge for this fee. An argument against it is that it takes too long for it to be fully processed.
Wire Transfer
In recent times, many people prefer making payments electronically to their lenders. The process is so easy that you get to make transfers even if you are not able to get to the bank before closing. This type of transfer is widely used across different financial institutions in the world. The way it works is that the sender would first make payment in advance in their financial institution. The bank in charge of facilitating the wire transfer then sends a memo to the receiving bank with underlying payment instructions. This is done via a system that is well secured. Most times, systems such as Fedwire are used for this transaction. The recipient’s bank gets needed details from the sending bank. And then proceeds to deposit funds from its own reserve into the recipient account. The entire process of the wire process might take probably days.
Cash
While your lender might not have an issue receiving cash at the closing date or you, it is however advisable not to use this payment mode. This is because it might raise a lot of questions afterwards. Cash is considered to be a legal tender, which could be in form of paper currency or coins. It serves as a means of exchanging goods and services. The use of cash for payment is the most accepted across all sectors.
However, due to the peculiarities of real estate situations, most companies forbid the use of cash to make payments during closing. It is also important to note that cash might refer to money at hand. And it could also cover valuable assets. It could also be money in the bank account as well as checks. The use of cash for payment is considered reliable. It might however be burdensome when you are required to pay a hefty amount of money. This is why many lenders prefer the electronic mode of payment.
Conclusion
It is important to be accustomed with the details on how to determine cash to close as well as making the necessary accrued payments. Having a proper knowledge would enable you to handle the purchase of your new home with ease. It is important to be conversant with all the details associated with cash to close as a concept. You could also approach your escrow company for advice. And of course, do not forget to enquire from your lender, what mode of payment is acceptable by them.