Real estate closing costs can quickly add up. And, if you don’t plan correctly, you may not have enough cash on hand when you need it. As such, real estate investors often ask: what happens if you don’t have all the money at closing?
Simply put, if you don’t have all the required money at closing, you won’t be allowed to close. This could lead to a seller lawsuit and/or forfeit of your earnest money deposit. As such, investors need to understand how to A) calculate closing costs; and B) secure additional financing, if necessary.
In this article, I’ll talk about closing requirements and how to figure out the money you need. Specifically, I’ll dive into each of the below closing-related topics:
Real estate investors casually throw around the terms “closing costs” and “cash to close.” Both of these terms represent funds you’ll need when closing on a house purchase. However, they are not the same thing, and investors need to understand the differences:
Let’s look at an example. Assume you’re purchasing a $200,000 property and putting 20% down. This means your loan totals $160,000 with a down payment of $40,000. On average, closing costs total between 2% to 5% of the purchase price, so let’s split the difference and call it 3.5%, or $7,000. In this scenario, none of these closing costs will be rolled into the loan itself. Here’s how the numbers work:
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I used round numbers for example’s sake, but real-world numbers won’t be so neat. However, investors need to understand: start planning for cash to close far ahead of the actual closing date. If you wait until the last minute to put together that much money, you may fall short.
In this example, if the investor doesn’t bring $46,000 to the closing, he or she has failed to bring all the necessary money to closing. This leads directly into the next section.
What Happens When You Don’t Have All the Money at Closing?
Homebuyers face one of three outcomes if they don’t have all the money at closing. These three outcomes share a common trait – if you don’t have all the money, you won’t close on the purchase when you’re supposed to close.
Buyers want to avoid all of the above possibilities. Bottom line, failing to bring all required money to closing won’t lead to any positive outcomes for buyers. To avoid this situation, buyers need to accurately calculate their closing costs. As I stated above, closing costs average between 2% and 5% of purchase price. On a $250,000 home, that’s a $7,500 swing – a lot of money. If planning on the low end of that average and final closing costs come out on the high end, you may not have enough cash to close.
Rather than leave closing costs to chance, buyers can calculate them a couple ways:
However you decide to calculate your closing costs, make sure to run the numbers early. If you find out you owe $10,000 in unexpected closing costs the day before a deal, it may be hard to pull together that much cash. On the other hand, if you know about that $10,000 before committing to a deal, you can factor it into your budget and plan for it.
If you don’t have all the money necessary for closing, options exist. With experience and a little creativity, you can even 100% finance a property, especially with the right hard money lender. But, if you find yourself in a situation where you need to quickly pull some money together to cover closing requirements, here are a couple options:
If you don’t have all the money at closing, both of these options can help you bridge the gap.
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