It’s important to be financially prepared when buying a property. With several things to pay to complete a transaction, are real estate commissions included in cash to close? We’re going to discuss what cash to close means, how to estimate and how to pay for it.
Are Real Estate Commissions Included in Cash to Close?
Real estate commissions are not included in cash to close because this is a different assortment of fees. Instead, cash to close covers downpayment and closing costs, minus deposits and credits. While the process depends on the company, it’s traditional for agents to receive commissions after completing a deal.
However, if you don’t want to deal with big commissions, it would be best to use a flat fee full service model so that you can limit these expenses while CA Flat Fee handles every step of the transaction and manages every aspect of it.
Understanding Cash to Close in Real Estate
Cash to close refers to the funds you need to prepare and pay to finalize a deal or purchase. This is why the cash to close doesn’t include the real estate commission, as this is a different payment that a company may settle before or after completing the deal.
Also known as funds to close, this covers the purchase price plus closing costs, minus fees from mortgage, earnest money deposit, or lender credits.
Breaking Down Cash to Close Payment
Typically cash to close is a buyer issue, unless the seller does not have enough equity in the sale to cover their fees and the commissions. Regardless, it’s essential that you identify the inclusions of the cash to close system.
- Downpayment: This may take up a massive chunk of the cash to close payment because it’s a percentage of a property’s purchase price that you need to pay upfront. However, this could reduce the loan amount.
- Origination charges: This is the fee for processing and other miscellaneous costs of creating your loan. You need to pay this to the lender for underwriting the mortgage.
- Closing costs: This covers expenses beyond the property itself, including application fee, title insurance, Homeowners Association transfer fee, inspection, the survey fee, property tax, and title search fee.
- Taxes: Depending on the agreement, buyers and sellers may split payment for government taxes, particularly real estate transfers and refinancing.
- Prepaid items: Lenders commonly establish a trust account or escrow to pay for prepaid expenses such as hazard insurance or assessment costs.
- Credits: If a buyer already pays for closing costs, a deduction or credits would reflect on the cash to close. Additionally, a seller would give credits to a buyer for potential repairs at closing. In effect, you may pay less during cash to close.
Calculating Cash to Close Expenses
The real estate home selling market sees a 20.7% growth due to increased mortgage applications, families seeking more space, and solid home-builder activity in recent times. This growth is increasing purchasing prices which in turn increase mortgage costs and related closing costs for buyers. Fortunately, you won’t have to worry about real estate commissions as part of the cash to close.
Sellers are especially able to take advantage of flat fee full-service while the market is very hot, since this kind of model would handle every process until closing day and minimize overall closing costs on this side of the transaction.
Buyers can generally find the total figure of lending costs on the Closing Disclosure form from the lender. It is important to note that most transactions send this final document at least 3 days before closing per legal regulations and lenders are required to give an estimate when you apply for a loan so you have transparency and truth in lending. If you want to determine a rough estimate of your payment, follow these steps:
- Follow the formula: [downpayment + closing costs] – credits and deposits = total cash to close.
- Note the house’s exact purchase price. If you’re still going through listings, decide on the maximum purchase price you’re willing to pay.
- Depending on your loan type, credit score, or contract, you may need to pay 3% to 6% of the purchase price as the downpayment as a minimum. For example, $15,000 would be your downpayment if you need to pay 3% of a property priced at $500,000.
- Closing costs are typically 1% to 5% of your loan amount. For instance, 1% of $500,000 equates to $5,000. So, $15,000 (downpayment) plus $5,000 (closing costs) = $20,000
- Subtract credits or deposits from $20,000, and the total would be your estimated cash to close payment.
Ways to Pay Cash to Close
The most common and secure payment form required by most escrow companies is a cashier’s check certified by banks.
While payment through wire transfers is also becoming popular, make sure to communicate with your closing agent properly to ensure you’re using the correct recipient account number. In this way, you can avoid falling victim to wire fraud, which saw a 48% increase in incidents.
What’s the Difference Between Closing Costs and Cash to Close?
Closing costs refer to the expenses that are owed at the close of a sale to satisfy the contract. On the other hand, cash to close refers to the total amount of money that you will will need to provide to the escrow company after all credits and fees have been taken into consideration.
What Happens If I Don’t Have Money for Cash to Close?
This depends on the terms of the contract. In some cases, the deal won’t close if you don’t have enough funds. Sometimes, you can get sued for non-performance, or be held to the responsibility of paying for it.
What If My Cash to Close Is Negative?
Negative cash to close is a good thing because it means you have extra money to spend. This usually happens when you get an excellent closing deal or a lender finances you more than you truly need which can result in additional money being distributed to you.
A home purchase can be a complicated experience full of fees and legalities. This is why knowing what’s included in cash to close can help you prepare for the process. Remember, you can always opt for a flat fee to save time and money in dealing with commissions.