Cash to Close and Seasoned Funds for Closing: Your 2024 Guide to a Smooth Home Purchase
When you’re ready to buy a home, two terms you’ll hear often are cash to close and seasoned funds for closing. These are important steps in the mortgage process, and understanding them will make your journey to homeownership a lot smoother.
In this guide, we’ll break down what cash to close and seasoned funds are, why they’re important, and how to make sure your funds are ready when it’s time to close. Whether you’re buying your first home or refinancing, this information will help you make sure there are no last-minute surprises. Let’s dive in!
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What Is Cash to Close?
Cash to close is the total amount of money you’ll need to bring to the closing table to complete your home purchase. You’ll get an estimate of this amount early in the mortgage process. Still, it’s important to understand that it can change slightly by closing day.
Cash to close typically includes:
- Down Payment: This is your initial contribution toward the purchase of the home.
- Closing Costs: These are fees and expenses like lender fees, title insurance, and appraisal fees.
- Prepaid Costs: This may include your first few months of property taxes and homeowners insurance.
Here’s how to keep track of cash to close:
- Loan Estimate Document: Within three days of applying for your mortgage, you’ll receive a Loan Estimate from your lender. This document includes an estimate of your cash to close based on the initial terms of your loan.
- Closing Disclosure: Closer to closing day, you’ll receive a Closing Disclosure, which provides the final cash-to-close amount. Compare it with your Loan Estimate, and check for unexpected fees or changes.
Pro Tip: If there are any questions about your cash-to-close total, do not hesitate to ask your lender for a comprehensive breakdown!
Why Are Seasoned Funds Important for Cash to Close?
In the mortgage world, seasoned funds mean funds that have been in your bank account for a specific amount of time, usually at least 60 days. Lenders require seasoned funds to verify that you didn’t borrow money at the last minute, which could signal financial instability.
Seasoned funds reassure lenders because they show you have steady control over your finances, making you a more reliable borrower. Think of seasoned funds as a way for lenders to confirm that the money in your account is genuinely yours and not borrowed or obtained from a risky source.
Here’s why it matters:
- Financial Stability: Seasoned funds show that you have a stable financial base and aren’t relying on last-minute loans to cover your cash to close.
- Reduced Risk: Lenders view borrowers with seasoned funds as lower risk, as it reduces the chance of default.
Acceptable Sources of Cash to Close and Seasoned Funds for Closing
Your cash to close can come from several sources, but they must be properly documented. Lenders look for these primary sources:
- Direct Deposits from Your Employer: Direct deposits of paychecks into your account are ideal. They are easily traceable and require no additional documentation.
- Savings and Investment Accounts: Money from personal savings or investments is usually acceptable, but you must provide statements showing that the funds have been in your account for at least 60 days.
- Gift Funds: Many buyers receive help from family members or close friends. If you’re using gift funds, make sure the donor provides the necessary documentation to avoid issues (we’ll explain more about this below).
- Other Documented Sources: These can include funds from selling personal property or other assets, as long as you have a clear paper trail showing their origin.
Important: Funds not from these sources may not qualify, so it’s critical to work closely with your lender to ensure all funds meet requirements.
Understanding Gift Funds and How They Work
Gift funds can be a great way to cover your cash to close. However, lenders require strict documentation to verify that gift funds are truly a gift and not a loan. Here’s how to make sure your gift funds are ready for closing:
- Gift Letter: Your donor (the person giving you the gift) must sign a gift letter provided by your lender. This letter states that the gift funds do not need to be repaid.
- Proof of Transfer: Keep records of the transfer, including a copy of the check (if applicable), deposit slip, and an updated bank statement showing the gift deposit.
- Bank Statements from the Donor: Certain lenders might request that the donor provide bank statements covering the past 30 days. This documentation must confirm that the funds have been in their account for at least 30 days. This requirement is important because it demonstrates that the funds were not hastily borrowed before the transaction.
Gift funds are widely accepted for down payments and closing costs, but they generally cannot be used for reserves—the funds left in your account after closing. Reserves usually need to be from your own funds.
What Not to Do: Avoiding Cash and Undocumented Funds
Cash on Hand: If you have cash in a safe at home or somewhere else, avoid using it for your cash to close. Lenders cannot verify cash deposits without a clear paper trail. To avoid complications, ensure that you deposit any cash into your bank account at least 60 days before submitting your mortgage application.
Unsecured Loans and Cash Advances: Avoid using payday loans, credit card advances, or other short-term loans. These can signal financial distress and may jeopardize your mortgage approval.
Quick Tip: Plan ahead! If you’re saving up for your cash to close, start moving funds into your bank account at least a few months before you apply.
Large and Irregular Deposits: What to Watch For
Lenders carefully review 60 days of bank statements leading up to your loan application, so be mindful of large or unusual deposits. Here’s how to avoid issues:
- Defining Large Deposits: Generally, lenders consider any deposit greater than 10% of your monthly income to be “large” and will ask you to explain where it came from.
- Documentation: If the deposit is legitimate and comes from a verifiable source, such as a tax refund, keep any related paperwork and provide it to your lender.
- Irregular Deposits: Lenders look for unexpected deposits that could signal last-minute borrowing. A documented explanation and paper trail are essential if you want these funds used for closing.
Preparing Your Cash to Close: Tips and Strategies for 2024
Getting ready for closing isn’t just about gathering funds. Here’s a quick checklist to help ensure a smooth process:
- Start Tracking Your Funds: Watch your bank account activity at least three months before closing. Avoid unusual transfers or big deposits without a paper trail.
- Avoid New Debts or Financial Changes: Lenders will check your credit right before closing, so avoid new loans or credit inquiries.
- Consult Your Lender Early: Talk to your lender about acceptable sources of funds and whether your cash-to-close amount is on track. It’s better to resolve issues early rather than risk closing delays.
Getting Your Final Cash to Close Estimate
Just before closing, your lender will send a Closing Disclosure document. This provides the final amount of cash to close based on the latest terms of your loan. Compare this amount to your initial Loan Estimate and check for any changes.
If you have inquiries or see inconsistencies, talk to your lender or loan officer immediately. They can clarify any modifications and help you feel assured about the ultimate cash-to-close figure.
Get Started Today
Understanding cash to close and seasoned funds for closing is essential for a smooth home-buying process. Preparing your funds in advance, documenting their sources, and working closely with your lender can make your path to homeownership easier and stress-free. If you need assitance, contact a loan officer to help you navigate the process and make sure you’re prepared for a successful closing in 2024.
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Frequently Asked Questions About Cash to Close and Seasoned Funds for Closing:
Q: What Does “Cash to Close” Mean?
A: Cash to close is the total amount of money you need to bring to closing day to complete your home purchase. This includes your down payment, closing costs, and any other fees.
Q: What are “Seasoned Funds,” and Why do I Need Them for Closing?
A: Funds are considered seasoned when they have been in your bank account for at least 60 days. Lenders stipulate seasoned funds to verify that the money is yours and hasn’t been recently borrowed. Presenting cash to close along with seasoned funds demonstrates to lenders that you are financially secure.
Q: Can I Use the Cash I’ve Saved at Home as Part of My Cash to Close?
A: No, lenders don’t accept cash saved outside a bank because it can’t be documented. To use it for cash to close and seasoned funds for closing, it should be in your bank account for at least 60 days before applying.
Q: Why is it Important to Document All Sources of Cash to Close?
A: Lenders need a clear record of where your funds come from to confirm they’re legitimate. For cash to close and seasoned funds for closing, lenders accept sources like your paycheck, savings, or gifts, as long as you provide the necessary paperwork.
Q: Can I Use Gift Funds for Cash to Close?
A: Yes, gift funds are allowed, but they must be documented. Your donor must provide a gift letter, proof of transfer, and sometimes bank statements to confirm the gift funds qualify as seasoned funds.
Q: What Happens if I Make a Large Deposit Close to Closing Day?
A: If you make a large deposit—generally over 10% of your monthly income—your lender will ask for proof of where it came from. Documenting large deposits ensures they’re legitimate cash to close and seasoned funds for closing.
Q: How Can I Avoid Issues with My Cash to Close Funds?
A: Start tracking and preparing your funds a few months before you apply for a loan. Avoid last-minute loans or moving cash between accounts, so your cash to close and seasoned funds for closing are well-documented and meet lender requirements.
Q: Can I Use Money from a Recent Loan as Part of My Cash to Close?
A: No, lenders don’t accept funds from unsecured loans, payday loans, or cash advances as cash to close. They want to see that you have seasoned funds for closing to ensure financial stability.
Q: What Should I do if My Cash-to-Close Amount Changes on Closing Day?
A: Your lender will provide a Closing Disclosure shortly before your closing date, outlining the final cash-to-close amount. Review it alongside your original Loan Estimate, and if you notice any discrepancies, request an explanation from your lender.
Q: Why do Lenders Care About “Seasoned Funds” for Closing?
A: Seasoned funds show lenders that your money is stable and hasn’t been borrowed last minute. This makes you a safer borrower because it shows that your cash to close and seasoned funds for closing are legitimate and reliable.
This blog about “Cash To Close and Seasoned Funds For Closing by Borrower” was updated on November 7th, 2024.
