What is Required Cash?
Required cash is a term that refers to the amount of money required to complete a transaction. Most commonly, it is used in a mortgage context and describes the amount of money a buyer must put down in order to qualify for a loan. The required cash amount varies depending on the amount borrowed and the terms and conditions of the loan.
Normally, required cash refers to the down payment, any origination points or discount points that a buyer must pay, any applicable insurance premiums and any other costs such as title insurance. Origination points are those points that the lender requires to open a loan; they may consist of the application fee and other fees assessed by the lender for underwriting the loan. Discount points are optional points that a buyer pays to lower his interest rate.
Within the mortgage industry, a 20 percent down payment is standard when a home is purchased. This means the required cash is based on a percentage of the total loan amount. For example, a buyer who is purchasing a home for $100,000 US dollars (USD) would have to put down a $20,000 USD down payment. The required cash would thus be $20,000 USD plus any additional fees or costs required for points or insurance.
Some buyers do not put down a full 20 percent down payment. Banks are willing to work with lenders who do not have the cash required by allowing them to structure the deal in different ways. For example, a buyer may be able to put down less than 20 percent and pay private mortgage insurance (PMI) monthly to protect the lender's investment, or might be able to finance the home using an 80-20 loan.
Private mortgage insurance (PMI) is required if less than 20 percent is put down on a home, because the cash required to finance a home normally provides the homeowner with equity. Without homeowner equity, if property values fall, the home could end up being worth less than the homeowner owes on it. This would mean the bank would not have security for its loan.
Alternatively, an 80-20 financing arrangement can be made in which the buyer takes two mortgages. The first mortgage, for 80 percent of the price of the house, is the primary mortgage. The other mortgage is a second mortgage that provides the buyer with the 20 percent cash required to originate the loan. In other words, the homeowner is borrowing the required cash necessary to close the first loan.
Discuss this Article
Post your comments