Negative Cash to Close: An Overview
Negative cash to close, also known as “excess funds at closing,” occurs when the amount of money a buyer needs to bring to the closing is less than the sum of their deposits and credits (Rocket Mortgage, 2024). This situation can arise due to several factors, including seller concessions or credits, lower mortgage fees, lender incentives, or underestimated closing costs by the buyer (Northside Legal, 2023).
Benefits of Negative Cash to Close
When cash to close is negative, it generally means that the buyer will either receive money back at closing or have leftover overpayment funds after the transaction (Northside Legal, 2023). This scenario is welcome news for buyers, as it means they will use less cash than originally budgeted for at the closing.
Causes of Negative Cash to Close
Several factors can contribute to a negative cash to close, including:
Key Facts
- Definition: Negative cash to close occurs when the amount of money you need to bring to the closing is less than the sum of your deposits and credits.
- Buyer’s benefit: When cash to close is negative, it generally means that the buyer will either receive money back at closing or have leftover overpayment funds after the transaction.
- Causes of negative cash to close: This situation can arise due to seller concessions or credits, lower mortgage fees, lender incentives, or underestimated closing costs by the buyer.
- Refund at closing: If the final cash to close calculation results in a negative amount, the excess funds will be refunded back to the buyer at closing.
- Communication with professionals: It is important to maintain open lines of communication with your lender and real estate professionals to ensure accurate calculations and understanding of the cash to close amount.
- Seller Concessions or Credits: The seller may offer closing cost credits or concessions, including tax prorations, that exceed the actual amount of the buyer’s closing costs. This results in overage funds after seller credits are applied (Northside Legal, 2023).
- Lower Mortgage Fees: If mortgage interest rates dropped between the time of loan application and closing date, prepaid finance charges would go down, reducing cash to close (Northside Legal, 2023).
- Lender Incentives: The lender may provide a lender credit or rebate toward the buyer’s closing costs as an incentive, lowering the buyer’s outlay (Northside Legal, 2023).
- Underestimated Closing Costs: Closing costs like title fees, escrows, or prepaid insurance/taxes came in lower than originally estimated by the lender, creating a surplus at closing (Northside Legal, 2023).
- Overestimated Cash to Close: The buyer may have overestimated their total cash to close needs early in the process and ultimately over-saved for their down payment and closing expenses (Northside Legal, 2023).
Refund at Closing
If the final cash to close calculation results in a negative amount, the excess funds will be refunded back to the buyer at closing (Northside Legal, 2023). For example, if a buyer sent funds based on an initial cash to close estimate of $15,000, but the actual costs at closing were only $12,000, the buyer would receive a $3,000 check or wire at closing.
Conclusion
While a negative cash to close scenario is atypical, it can occur for various reasons. It is important for buyers to maintain open lines of communication with their lender and real estate professionals to ensure accurate calculations and understanding of the cash to close amount. By doing so, buyers can avoid any financial surprises or shortfalls at settlement and take advantage of the benefits that a negative cash to close can offer.
References
- Northside Legal. (2023, November 2). What happens if cash to close is negative for a House? https://northsidelegal.com/what-happens-if-cash-to-close-is-negative/
- Rocket Mortgage. (2024, February 5). Cash To Close: Breaking It Down. https://www.rocketmortgage.com/learn/cash-to-close
- The Investor’s Edge. (2021, January 25). Why is My Cash to Close a Negative Number? https://www.theinvestorsedge.com/blog/why-is-my-cash-to-close-a-negative-number
FAQs
What is negative cash to close?
**Answer:** Negative cash to close occurs when the amount of money a buyer needs to bring to the closing is less than the sum of their deposits and credits.
What are the benefits of negative cash to close?
**Answer:** When cash to close is negative, it generally means that the buyer will either receive money back at closing or have leftover overpayment funds after the transaction.
What are the causes of negative cash to close?
**Answer:** Negative cash to close can be caused by seller concessions or credits, lower mortgage fees, lender incentives, underestimated closing costs, or overestimated cash to close needs by the buyer.
How is negative cash to close calculated?
**Answer:** Negative cash to close is calculated by subtracting the total closing costs from the sum of the buyer’s deposits and credits.
What happens if the cash to close calculation results in a negative amount?
**Answer:** If the final cash to close calculation results in a negative amount, the excess funds will be refunded back to the buyer at closing.
Is negative cash to close common?
**Answer:** Negative cash to close is not common, but it can occur for various reasons.
What should buyers do if they have negative cash to close?
**Answer:** Buyers should maintain open lines of communication with their lender and real estate professionals to ensure accurate calculations and understanding of the cash to close amount.
Can negative cash to close be used to cover other expenses?
**Answer:** No, negative cash to close cannot typically be used to cover other expenses, as it is considered a refund of excess funds.