What is cash-to-close?

Cash-to-close is the amount of funds that you will be required to bring to the closing table when you sign the final documents to make the house your own.  It includes the purchase price of the home plus lender’s fees, appraisal fees, title company closing costs, required down payment, costs to start your escrows for property taxes and insurance (and more) MINUS the funds you are borrowing (the mortgage), earnest money deposit, seller concessions, and in Indiana, the prorated property taxes that the seller owes the county but is not due yet.

While it may sound odd to the borrower, it is very important to provide proper asset documentation and the actual source of the funds for the earnest money deposit,  down payment and closing costs. Lenders use the term sourced and seasoned meaning that the funds came from a verifiable source and can be proven to be available at closing.

For example, if your employer pays by direct deposit, it is easy to match your pay statements to the deposits in your checking account making the verification process easy. However, if you receive a physical paycheck, you should always deposit the entire check and then withdraw any required cash. This way, the lender can see the exact amount matching the paycheck being deposited on or near the payroll date. If you were to cash the check, pocket some of the funds and deposit the remainder, it will be more difficult to show where the funds came from.

Since the underwriter typically wants to see two months of bank statements, it’s important to pay attention to what your account looks like before you start house shopping. While it’s true that the underwriter wants to make sure you have enough funds to close, they may be less inclined to loan you hundreds of thousands of dollars if you have numerous overdrafts on your account. They like to see good money management skills.

A Few Acceptable Sources Of Down Payment Include:

• Bank Accounts – checking and/or savings. It is usually best to have all the necessary funds in one (or maybe two) accounts instead of many different accounts.
• Investment Accounts – money market and mutual funds. Will need to see a statement showing the available funds and the “paper trail” if the funds have to be sold and the cash moved to a checking account
• Retirement Funds – keep in mind that borrowing against a 401K plan or other retirement accounts may require repayment and that could affect your debt-to-income ratios. It is always best to check your plan guidelines first.
• Life Insurance – Cash value and face amount. Will need to show that these funds are available to use.
• Gifts – Family members can gift (no expectation to be paid back) down payment funds with certain restrictions. This is usually reserved for gifts from parents (or step-parents), grandparents, brothers, or sisters. There are a few exceptions to the family member rule, so ask us if you have someone willing to gift you the funds.
• Inheritance / Trust Funds – must show evidence that funds are available and, if this is a large source of monthly / yearly income, that the funds are sufficient to continue.
• Government Grants – Some state, county, and city agencies offer special down payment assistance programs. Many are recorded as a 2nd lien (a loan to you) and then forgiven if you stay in the home for a predetermined period of time. If you don’t, they may have to be repaid.

Warning – Unverified sources of cash are NOT acceptable. This includes “Mattress Money”. If you need $5,000 for closing costs and have $10,000 on hand but only $4,000 can be sourced and verified, you will NOT be able to close.

It is very important to discuss the source of your down payment and closing costs as early in the loan process as possible to make sure that it will be acceptable to the underwriter. While it is OK to use funds from your wedding or to sell an asset such as a car to get the necessary cash, it must be documented well and in a way that the underwriter will accept.

At the closing, you will need to have the funds wired from your account or bring with you a cashier’s check for the closing costs depending on the amount. While you can wire smaller sums, any amount over $10,000 MUST be wired to the title company prior to closing.