Understanding the Total Cash Required

Hi, everyone! I’m Ron Pero, The Loan Professor. As I mentioned, many buyers are surprised to discover that additional cash is required beyond the down payment. This can be a bit unsettling, especially if your finances are tight.

The purpose of this article is to clarify what expenses you’ll need to cover so you can be well-prepared for closing day. I’ve created a PDF document listing all the items that require cash when purchasing a house. You can download your copy via the link provided below.

What You’ll Need to Pay For

In a previous video, I covered the costs involved. To recap, you need to have cash available for the following:

1. Down Payment: This is usually a percentage based on the loan program. For example, an FHA loan typically requires a 3.5% down payment.
2. Closing Costs: These are detailed in the Loan Estimate, a document that lenders must provide within three business days of your application.
3. Pre-Paids:
   • These are deposits for an escrow account that covers property taxes and homeowner’s insurance.
   • Instead of receiving a bill from the county or your insurance agent for the property taxes and homeowner’s insurance when they come due, the lender will usually require you to deposit 1/12th of these amounts monthly into a special savings account called the escrow account. (This is part of the monthly mortgage payment)
   • After you close on a house, you will not make your first payment until the month after the first full month after your loan closing.   So, for example if you close on the 15^th of October your first mortgage payment will come due on the first of December.  But in order for there to be enough money in that special escrow account you have to deposit 2 months’ worth of taxes and insurance plus You’ll need to provide enough for a one-month cushion into that account.
4. Pre-Paid Interest: You always must start to pay interest on money that you borrowed the day that you close on the loan.  Mortgage payments are almost always due on the 1st of each month, but if you close on a different day, like the 15th, for example rather than charge you a partial payment at the end of the first month lender’s simply collect the interest that will accrue during that partial month at closing.  This is called pre-paid interest because you are pre-paying it at closing before it has actually accrued.
5. Appraisal and Mortgage Credit Report: These are typically paid when you apply for the loan, either by check or credit card.
6. Home Inspection: While not a closing cost, a professional home inspection is highly recommended to identify any major structural issues with the property. This is usually paid directly to the home inspector by the borrower at the time of the inspection.
7. One-Year Homeowner’s Insurance Policy: This is usually purchased separately from an insurance agent and paid out of pocket by the borrower.
8. County Charges: At the bottom of page 2 of the Loan Estimate, you’ll see charges such as the Conveyance Fee (a tax for transferring property ownership) and recording fees for the deed and mortgage.

Credits That Can Reduce Your Cash to Close

Fortunately, you may receive credits that reduce the amount of cash needed at closing:

1. Seller Credits: The seller must credit you for property taxes from the last payment date to closing. For example, if you close in October and taxes are due in July, the seller will credit you for the period from July to October. In Ohio, property taxes are paid in arrears meaning that when property taxes come due the taxes that are being paid are actually from the previous six months.  The seller has to transfer these taxes to the buyer at closing and so this means that the buyer also receives an additional credit for those 6 months of property taxes.

2. Title Insurance: In Ohio, the seller covers the cost of the lender’s title insurance policy. You are responsible for a portion of the cost, and the seller pays the remainder.

3. Negotiated Seller Contributions: On FHA loans, you can negotiate with the seller to cover up to 6% of the purchase price for closing costs and pre-paids. This credit can be used to cover closing costs, pre-paids and it can be used to buy down the rate, but it cannot be used for the down payment.

4. Lender Credits: Sometimes, the lender can offer a credit that offsets some pre-paids and closing costs. They might present two rates: one with and one without the credit, which can be helpful if you’re short on cash.

Final Thoughts

The process might seem overwhelming, but having a detailed conversation with your lender about these expenses can make things much clearer. This way, you’ll have a solid understanding of what lies ahead.

Most buyers appreciate being well-informed, especially when it comes to knowing the costs they’ll need to cover.

Buying a house is exciting and fun, but it can also be stressful. It’s a significant milestone, and being prepared can help ease the stress, making the experience much more enjoyable.

I hope you find this information helpful and informative. Happy homebuying!