Cash To Close Definition

The definition of Cash to Close extends to the verification of the assets used to pay it. The lender must rigorously document that the borrower has sufficient funds from acceptable sources to facilitate the closing. This involves documenting all funds used for qualifying, closing, and satisfying debt. Acceptable sources include verified checking and savings accounts, cash on hand (with explanation), retirement accounts, and stocks. The lender must confirm these assets cover the difference between the total acquisition cost and the mortgage amount.

Yes, non-realty items, often referred to as chattel or personal property, affect the Cash to Close calculation. If the borrower agrees to pay for items such as furniture or equipment separately from the real estate transaction, the cost of these non-realty items is included in the borrower’s total cash requirements for the mortgage. This ensures that the lender accounts for all financial obligations the borrower incurs to acquire the property, preventing undisclosed side deals that might impact the borrower’s repayment ability or the true loan-to-value ratio.

Premium Pricing refers to credits provided by a lender at a chosen interest rate, which can be used to pay the borrower’s actual closing costs and prepaid items, effectively reducing the Cash to Close. These credits are not considered Interested Party Contributions unless the lender is also the seller or builder. It is important to note that funds derived from Premium Pricing cannot be used to pay off debts, collection accounts, judgments, or escrow shortages; they are strictly designated for offsetting closing costs and prepaid items.

Generally, real estate agent commissions are paid by the seller, but if a borrower is represented by an agent and is obligated to pay a fee directly to that agent, this expense increases the Cash to Close. Specifically, such real estate agent fees must be included in the total of the borrower’s settlement requirements. This inclusion ensures that the estimate of cash required to close is comprehensive and reflects all direct financial obligations the borrower must satisfy to finalize the real estate purchase transaction.

The Upfront Mortgage Insurance Premium (UFMIP) is a fee required for FHA loans, usually calculated as 1.75 percent of the base loan amount. While most borrowers finance this premium into their mortgage to reduce immediate out-of-pocket expenses, it is permissible to pay it in cash. If a borrower elects to pay any portion of the UFMIP in cash, that specific amount is added to the total cash settlement requirements. Consequently, paying the UFMIP in cash directly increases the borrower’s calculated Cash to Close at the settlement table.

Yes, sellers and other “Interested Parties” (such as real estate agents or builders) can reduce a borrower’s Cash to Close by contributing up to 6 percent of the sales price toward closing costs, origination fees, prepaid items, and discount points. These are known as Interested Party Contributions. However, these funds strictly cannot be used to satisfy the borrower’s Minimum Required Investment (MRI) or down payment. If contributions exceed the actual closing costs or the 6 percent limit, the excess is considered an inducement to purchase and reduces the adjusted value of the property.

The Earnest Money Deposit serves as a credit that lowers the final Cash to Close amount due at signing, as it is a pre-payment made toward the transaction. The lender must verify the amount and source of the deposit if it exceeds 1 percent of the sales price or appears excessive based on the borrower’s savings history. To be credited against the cash requirement, the lender requires documentation such as a canceled check or a certification from the deposit-holder acknowledging receipt, ensuring the funds originated from an acceptable source.

Prepaid items are expenses associated with property ownership that must be paid in advance at closing, thereby increasing the Cash to Close requirement. These typically include premiums for hazard and flood insurance, real estate taxes that are due, and per diem interest. Furthermore, if the borrower chooses to pay any portion of the Upfront Mortgage Insurance Premium (UFMIP) in cash rather than financing it, that amount is added to the total cash settlement requirements. Lenders must ensure these charges comply with Consumer Financial Protection Bureau (CFPB) requirements.

To calculate the Cash to Close, the lender estimates settlement requirements that go beyond the purchase price. These costs include the Minimum Required Investment (MRI), which is the down payment, along with reasonable and customary origination fees and other closing costs. The total also encompasses discount points if the borrower buys down the interest rate, and prepaid items such as flood and hazard insurance premiums, real estate taxes, and per diem interest. Additionally, any non-realty items (chattel) the borrower agrees to pay for separately are added to these total cash requirements.

For a purchase transaction under FHA guidelines, “Cash to Close” is strictly defined as the difference between the total cost to acquire the property and the total mortgage amount. This figure represents the liquid assets a borrower must provide at the settlement table to finalize the purchase. It is not merely the down payment; rather, it is the aggregate total derived after subtracting the loan proceeds from the sum of the purchase price and all other acquisition costs. The lender must rigorously document that the borrower has sufficient funds from acceptable sources to cover this calculated amount.