Understanding Cash to Close and How Much You Will Actually Need for Closing

House buying is complicated. But that’s the reason you hire professionals to help. One of the most confusing items that people come across during the process is the term “cash to close.”

“Cash to close” is the actual amount you will need to purchase your home on closing day. “Cash to close” is comprised of your mortgage down payment and closing costs. Your “cash to close” takes into consideration the credits you will receive on closing day.

Here in the Chicagoland area, you will typically receive credit for property taxes that are not yet due and payable for the year in which you are closing, and sometimes part of the prior year. Unlike most states, we pay property taxes in arrears, meaning if you close in 2022, you will receive credit for some or all of 2021, plus the prorated amount of the year for 2022. You will pay property taxes for 2022 in 2023. The Seller gives you credit for these taxes because you don’t want to have to ask the Seller for money after closing in 2023 for these taxes. Once you close, you’re “settled up” with the Seller, so to speak, and even though that tax bill is for a period of time when you may not have owned the property, you will be responsible for paying it.

Here is an example:

The closing for 546 West Main takes place on January 4, 2022. The total tax bill for 2020 was $7,590.45. Taxes for 2021 are due on June 1 and September 1 of 2022. But the tax bill for 2021 has not yet been released because the bills aren’t due yet. So the contract calls for a tax proration of these taxes at closing, at 105%. so the buyer receives the following tax credit:

Total tax bill for 2020 - $7,590.45

Total tax credit for 2021 - $7,590.45 x 105% = $7,969.97 (the proration is at 105% to give a “cushion” in case the tax bill has an increase that the parties are not yet aware of. These prorations are typically final, regardless of what the bill actually turns out to be.)

Total tax credit for 2022 - $7,969.97/365 days in 2022 = $21.84/day*4 days in 2022 = $87.36

So the buyer will receive a total of $7,969.97 tax credit for 2021 taxes, due that year in 2022, and a total of $87.36 credit in taxes for the 2022 tax year, that won’t be billed until 2023. This amount will be subtracted from their down payment and closing costs, meaning $8,057.33 less money that the buyer will need to bring to the closing table.

When you receive your initial loan estimate (LE) from your lender, you may see that the credit for taxes is not on the estimate. When the lender qualifies you for financing, they will not typically take this credit into consideration. They want to make sure you would have the money, and the ability to pay the loan, without that credit. As you get closer to closing, and see additional closing disclosures (CD) as the process goes on, you will see your cash to close, or bottom line will change.

Questions about these numbers should be addressed with your lender, and at closing, your attorney will review these figures with you again before signing them and making them final. Once you sign the CD at closing, and closing is done, there are no changes. Make sure you understand the final numbers, and that they are accurate, before you sign.

I’m going to be writing more about this in future blogs, so stay tuned.