As you approach the closing of a home purchase, one of the critical elements you need to do is properly manage and transfer your funds required for closing. You have already made an earnest money deposit, but you need to transfer the remaining funds which includes the rest of your down payment and any closing costs or prepaid expenses that you owe. The amount of money is usually pretty substantial, and it pays to be prepared. There are common mistakes that we see buyers make, and depending on the severity of your mistake, it can lead to a delayed closing or in a worst case scenario, a failed purchase and loss of your earnest money deposit. Here are some tips to prepare your funds to close on the purchase of a home. (Closing procedures do vary state-by-state, so be sure to ask for clarification of how things work in your area.)
- Estimate the amount you will need – In most transactions, you will not know the exact amount you need to pay until 1-2 days before closing. It would be nice to know earlier, but the escrow company cannot calculate the exact dollar amount until they receive the final loan documents and are able to properly pro-rate all expenses such as taxes, HOA dues, etc. Your lender will provide a Good Faith Estimate during the loan application process. This will estimate your closing costs and funds required to close, but it won’t be exact. You should use this estimate to prepare your funds for closing before you receive the final numbers.
- DON’T BUY ANYTHING BIG, DON’T SEEK ADDITIONAL CREDIT – Under no circumstances should you buy a car, open a credit card, or shop for other sorts of loans during the home loan process. Doing so has the potential to affect your credit scores and debt ratios, which will require your file to be underwritten again. This is almost certain to cause a delay, and in extreme cases, it will cause your home purchase to fail. You will likely lose your earnest money if you make this mistake and can no longer obtain a loan.
- You need to provide certified funds – Your final payment to escrow will need to be in certified form, which is either a cashier’s check or wire transfer. Personal checks will not be accepted. In order to wire money or receive a cashier’s check, make sure that your funds are readily accessible in a checking account. Savings accounts, CDs, and similar accounts may not allow for wire transfers. If you have an online bank, double check their wire procedures and transfer early if you need to.
- Sell stocks/bonds early – It takes time for sales of securities to settle and additional time to transfer proceeds to a checking account. Make sure you account for this if any portion of your down payment is dependent on the sale of investments.
- International transfers – Transfers from international accounts are notoriously slow. Start the process early if your money is overseas.
- Be able to document everything – It is not unusual to be asked for a paper trail of your down payment. Lenders want to make sure that you are not borrowing additional funds. Make sure you can provide this. Have bank statements, cleared checks, etc., ready to provide to the lender.
- Keep the money in one place – This goes along with being able to document everything. We’ve seen buyers transfer money back and forth numerous times at the last minute. Maybe to optimize interest or maybe to avoid fees. Having money hop from account-to-account before closing makes the paper trail of your down payment difficult to track and is guaranteed to confuse your lender.
- Gift funds – If you are receiving a gift from your family members, you must be able to document its source and that it is truly a gift. Gift guidelines vary with loan program, so plan early to provide this documentation.
- If you absolutely must borrow – If you fall just short of the funds required to close and must borrow from somewhere, you need to be upfront with your lender at the earliest possible moment, and tell them what you are planning to do. A cash advance from a credit card may show up at the last minute if the lender re-runs your credit report and larger balances appear.
- Overpay if you need to – If your loan process gets pushed until the last minute before closing, it is easy to fund your portion with a little extra money. Any overage will be credited to you on your closing statement, and the money will be returned to you after closing by the closer.
If you have questions about your funds needed for closing, your lender is the best source of information to make sure that you don’t hit any snags in the closing process.