While your down payment plus the mortgage will cover the purchase price of your home, you do need to be prepared to come up with even more money for all of the other expenses involved when getting a mortgage. You’ll pay some costs at the beginning of the home-buying process and others, known as closing costs or disbursements, when your home purchase is completed.
This figure is not a “set in stone” number for everyone so it’s important for you to be fully aware of an approximate amount that will be due before you choose a home to buy to avoid any added stress at closing time.
Mortgage calculators can provide help determine how much you can borrow and at what rate, but that isn’t the only important figure. While coming up with a down payment is a critical step, I have found a number of first-time buyers are so obsessed with accumulating that amount that details such as closing costs are missed initially.
To help clarify what the costs associated with buying a house are, here’s a list of some of the expenses you can expect to incur when you’re thinking about buying your first home:
- The deposit is usually a part of the offer to purchase and is presented to the seller when you want to purchase the property. It shows the seller that you’re a serious buyer and is held in trust until the closing date, at which point it becomes part of the down payment.
- The down payment is the money that you need upfront to purchase a home. If you’re going to get a mortgage for an owner occupied home, you must put down a minimum of 5% of the purchase price of the property in cash. If your down payment is less than 20%, then you will need to get mortgage default insurance. The premium is generally rolled into the mortgage but can be paid upfront as part of the closing costs. Some provinces have taxes on these premiums which cannot be added to the loan amount; it’s due at closing.
- Your down payment can come from personal savings and assets, RRSPs (Registered Retirement Savings Plan), gifts from families, or in some cases, may be borrowed.
- An appraisal of the property may be required. The purpose of the appraisal is to assess the value of the property and to make sure that the lender isn’t lending you more than the property is worth. Typically, the lender won’t lend a buyer more than the property’s appraised value because if the buyer defaults and the lender must foreclose on the house, they need to be able to sell it for the amount that was lent out plus the costs of the foreclosure. This fee can be around $300.
- A home inspection is not usually required by the lender, however, a good idea to get. Talk to your realtor about reputable Home Inspectors. Cost could be around $500-600
- The land transfer tax is a provincial tax on the sale or purchase of property ranging from 0-2%, and if you’re in Toronto, you pay a municipal tax as well. Buyers in Alberta and Saskatchewan don’t pay land transfer taxes, but smaller land transfer fees instead. First-time buyers in Ontario, British Columbia, Prince Edward Island, and Toronto may be entitled to receive a rebate.
- Interest adjustments are one of the most overlooked closing expenses. It’s probably because many homeowners don’t expect to make any mortgage payments for up to a month after their closing date. If a borrower doesn’t close at the beginning of the month, they’ll often owe their lender an interest adjustment from the date the mortgage was funded to the 1st day of the following month. For instance, if you move in on the 15th, you have to pay a daily interest charge to the lender for approximately 16 days from the 15th to the 1st day of the following month and if you want to pay monthly, the 1st monthly mortgage payment would be due 1 month later. It really depends on the lender as some of them will set the interest adjustment date on your closing date regardless of what day it is during the month.
- Property tax adjustments are not easy to explain, but I will try. There are essentially 3 different ways to pay your property taxes. You can pay once each year as a lump sum or have them collected throughout the year by your lender with your payments where they will accumulate in a separate account. Once each year, your lender will use the funds in that tax account to settle the tax bill. The 3rd option is to pay through your local municipality if available. It is a monthly property tax installment program where 1/12th of the property taxes are collected from your bank account each month by the city usually on the first of each month. Under this last option, there is no due date when a lump sum is due, just monthly installments are required throughout each year. The amount required under closing costs will depend on when the property taxes are due in your municipality, when you take possession of the home and how the previous owner paid them. In Edmonton, property taxes are due in full June 30th of each year, though the amount due is calculated from January to December of that year.
- There are several administrative searches that may be done as part of the home buying process. These include: title searches, which ensure that the seller has the legal right to sell the property and that there aren’t any liens, mortgages, or property line issues that could invalidate the purchase agreement. The fees for these searches are usually less than $100 each and will form part of your legal fees.
- Title insurance, although not always required, protects property owners and their lenders against losses related to the property’s title or ownership up to the policy’s stated maximum amount. It covers unknown title defects, existing liens, encroachment issues, real estate title fraud, survey errors, or identity fraud, where someone has assumed a property owner’s identity to secure finance against that property. Title insurance premiums range from $300-$500.
- If you’re buying a condominium, most jurisdictions require an Estoppel Certificate. An Estoppel Certificate outlines a condominium corporation’s financial and legal state of affairs. It can include bylaws, rules and regulations, insurance information, the balance in the reserve fund, the legal description of the unit, information about any legal filings, judgments against the Condominium Corporation, special assessments and insurance claims. The certificate is $100-$200.
- Lawyer fees can range from $1400-$2500, however do call for quotes if you haven’t been referred to one by one of the many professionals involved in the home buying process. The lawyer is the person who combs through all of the paperwork and makes sure that everything is legitimate and binding. They handle the various searches and registrations, including title insurance, property and execution searches, and the registration of the mortgage and land title. Other costs charged by the lawyer would be incidentals such as couriers, certified cheques, and photocopying, land transfer tax if applicable, the down payment, and any interest adjustments. Depending on the time of year that the home is purchased, you might have to reimburse the seller for any pre-paid fees as well, which may include property taxes, condo fees or utilities. When getting an estimate for a real estate lawyer, make sure to get as detailed of a breakdown of costs as possible. For all of the grumbling about lawyers, their role is one of the most important in the home buying process. Expect to surrender a couple of hours to the closing process, and to feel a little overwhelmed while signing your name so many times – and forking over so much cash. But in the end, you’ll have the keys to your new home to show for it.
If you need to discuss this or any other Mortgage related topics, contact the MortgageGirlca. Former banker turned Mortgage Broker. #expertadvice Contact by phone 780-433-8412, email – firstname.lastname@example.org, Facebook, Twitter. To read about more topics follow the Mortgagegirlca blog.