Cash to close

Key Takeaways

• Cash to close is the total a buyer must deliver at closing, and it is larger than the down payment by itself.
• The figure adds closing costs and prepaid items to the down payment, then subtracts credits already coming to the buyer, such as earnest money, the loan proceeds, and any seller credit.
• Earnest money lowers cash to close because it is credited to the buyer on the settlement statement rather than returned as a separate check.
• Cash to close is a buyer-side figure. The mirror figure on the seller's side is net proceeds, what the seller receives after payoffs and costs.

What It Means

Cash to close is the money a buyer has to deliver to the closing agent to finish the purchase. It starts with the down payment, adds the buyer's Closing Costs such as lender fees, escrow and title charges, and recording fees, and adds prepaid items such as the first year of hazard insurance, interest for the days left in the closing month, and the reserves the lender collects for future taxes and insurance.

Then it subtracts what the buyer already has coming. The Earnest Money sitting in the closing agent's trust account is a credit. The loan proceeds the lender wires are a credit. So is any Seller Concession the contract provides.

Because the number is a running total of debits against credits, it moves whenever anything in the file moves. A larger loan lowers it. A rate lock that expires and costs an extension fee raises it. A repair credit negotiated after inspection lowers it. That is why the amount a buyer hears at application is an estimate, and the amount on the final settlement statement is the one that has to be funded on closing day.

How It Works in Washington

In Washington, the form the money arrives in matters as much as the amount. RCW 18.44.400 requires a licensed escrow agent to deposit client funds held pending closing into a trust account "not later than the first banking day following receipt thereof," and it bars the agent from making "disbursements on any escrow account without first receiving deposits directly relating to the account in amounts at least equal to the disbursements." The same section adds a timing rule: no disbursement "until the next business day after the business day on which the funds are deposited unless the deposit is made in cash, by interbank electronic transfer, or in a form that permits conversion of the deposit to cash on the same day the deposit is made."

The practical result is that a buyer who shows up with a personal check for cash to close can stall the closing while it clears, so Washington closers ask for a wire or another immediately available form of funds, timed to arrive before the recording appointment. The Escrow agent handling the file is regulated under chapter 18.44 RCW, the Escrow Agent Registration Act, and that agent is the party who computes the final figure and tells the buyer what to send and when.

Example

Priya buys a condominium in Everett for $400,000 with 10 percent down, so her down payment is $40,000 and her loan is $360,000. Her final settlement figures show $6,800 of closing costs and $2,450 of prepaid items (the first year of hazard insurance, 12 days of prepaid interest, and the lender's tax and insurance reserve). She deposited $8,000 of earnest money when the offer was accepted, and the seller agreed to credit her $3,000 toward closing costs.

Debits: $40,000 down payment plus $6,800 closing costs plus $2,450 prepaid items equals $49,250.

Credits: $8,000 earnest money plus the $3,000 seller credit equals $11,000.

Cash to close: $49,250 minus $11,000 equals $38,250.

The $360,000 loan does not appear in the arithmetic because starting from the down payment already nets the loan out of the $400,000 price. Priya wires the $38,250 the day before closing so escrow has collected funds in hand.

Common Mistakes and Exam Traps

• Cash to close is not the down payment. A question that gives only the price and the loan-to-value ratio is usually testing whether you remember to add closing costs and prepaid items.
• Earnest money is a credit, not an extra payment. Adding it on top of the down payment instead of subtracting it is the most common wrong answer.
• Prepaid items are not lender fees, but they are still part of cash to close. Insurance premiums and escrow reserves belong in the total.
• Cash to close belongs to the buyer's column on the settlement statement. The comparable figure for the seller is net proceeds, and swapping the two is a standard distractor.