Every mortgage has closing costs, how it's paid is another thing. Within the mortgage industry, everyone has abbreviations or terms that we use on a daily basis that may not make sense to most people. For example, LTV to all lenders means "loan to value", but someone outside of the mortgage industry may not understand that. DTI is another one – debt to income. Even that may not make sense to everyone – what income, gross or net monthly income? (The answer is your gross monthly income). Cash needed at closing is another area.
Every loan has closing costs, no one works for free. The appraisers, processors, underwriters and closers all need to be paid. The difference is in how the closing costs are paid. Closing costs are paid for by the borrower with cash, seller paid closing costs or a higher interest rate to cover the closing costs. In a refinance, they may be added to the mortgage.
The cash needed at closing includes your down payment, closing costs and prepaids (interest, tax and insurance escrows, etc). The cash that the lender needs to verify includes the cash needed at closing and reserves.
When a lender talks about cash to close, that is sometimes the amount needed to bring to closing. We may need to verify more than what you need at closing if your loan requires reserves. Reserves is cash needed in your bank account (or 401K, stock, etc) that is liquid and can be used if you need help in making your payment. Sometimes loans will require an amount equal to 1-2 months of house payments. If you are buying an investment property, you may need 6 months of reserves. This isn't money that is brought to closing, but it still has to be verified.
Lenders verify your cash to close and need to make sure it is seasoned. That means you need to show that you have had the money in the bank for about 60 days. If there are large deposits, the lender is going to ask where the money came from. If it came from another person, you are going to need to get a gift letter and show documentation for the transaction. If you sold something, you need to be able to document the sale.
When you are comparing costs with different lenders, you want to compare the closing costs for the loan – in other words what the loan is going to cost you. Just be aware there will be more needed at closing – your down payment and your prepaids (escrow and interest). Make sure you ask how much money you will need at closing – especially on a refinance. Less is not always better. With a refinance, the lender may say that you need nothing at closing, but may not give you exactly what they are charging you until you lock in and commit to them. They may be charging you more, but adding it to the mortgage. You need to see what the new loan amount is along with the cash that you will need to have in the transaction.
Make sure you understand how much money you will need for closing and what you will need to bring to the closing. Usually you need to bring a cashiers check made out to yourself and then you sign the check over to the title company. If you need more money, you can usually write a personal check and if you bring more than you need, the title company will cut a check back to you.
If you have questions about the cash needed at closing, make sure you ask. It's better to ask about it and understand the transaction. It seems like the cash needed at closing should be simple, but there are lots of different pieces involved in the number. The days of interest may change if your closing date changes, your insurance may be more than was estimated, etc.
