When you buy a home, you probably focus on saving for a down payment. You know you need a big chunk of money to get the home you want. But after the down payment, there are the closing costs to consider. If you overlook this expense, you could find yourself thousands of dollars short when it’s time to close.
So how do you figure out how much cash to close you need for a mortgage? Keep reading to find out.
The Loan Estimate
Today, when you apply for a loan, the lender has three business days to send you a Loan Estimate. This disclosure replaces the Good Faith Estimate. On this document, you’ll see the ‘Estimated Cash to Close’ at the bottom of page one. This gives you an estimate of the money you’ll need at the closing table. Remember, this is before you formally accept the loan and move forward with processing. At this point, you still have time to re-negotiate things and make sure you have enough cash to close.
If you want a more detailed explanation of how that total came to be, flip to page two of the Loan Estimate. Under the ‘Calculating Cash to Close’ section, you’ll see a breakdown of how the total came about. You’ll see the following:
- Total closing costs – The total closing costs for the lender and all third parties
- Closing costs that you rolled into your loan – If you worked with the lender to roll your costs into the loan,they will be subtracted from the cash to close
- Down payment – This is the amount you agreed to put down on the home or that the loan program requires
- Earnest money deposit – If you put any money down as a deposit or in good faith, this gets subtracted from the cash to close
- Seller credits – If the seller is helping you with closing costs, they get subtracted from the cash to close
- Any miscellaneous adjustments
This is the breakdown of your cash to close as it stands when you first apply for the mortgage.
Figuring Out Your Exact Cash to Close
The Loan Estimate should be fairly accurate, but as the name suggests, it’s an estimate. You’ll get another chance to see your exact necessary cash to close when you receive the Closing Disclosure three days before your closing.
The Closing Disclosure will show the exact closing costs and the total amount of cash you need for the closing. The numbers should be similar, if not the same. If there are differences, compare the two documents to see where the changes occurred.
Sometimes lenders estimate what the appraisal, title fees, and other third-party fees may cost, which may alter the total cash needed to close. If the difference is large, though, it’s worth questioning the lender. Find out exactly what changed and make sure it’s accurate.
On average, you can expect to pay 3% to 5% of the loan amount in closing costs. You’ll need to add the amount of your down payment to that amount. You can then subtract any earnest money deposits you made as well as any seller credits you negotiated on the purchase contract. This should give you the best guess at how much money you’ll need to close your loan.