Many people think that if they have saved up $20,000.00 as a down payment to buy a house, that is all they need. The down payment is only one of the COSTS of buying a new home.
If you are a first-time buyer or first time real estate investor, you need to be aware of the “Closing Costs.” These are all the things that go along with buying a property. If you’re buying an income property there are even more costs than if you are just buying a house.
You can choose not to pay for all of them, or do some of the things yourself, but most are inescapable. The list here is not exhaustive. Each area of the country has different rules. But these are fairly common.
In Canada, closings are usually handled by a Lawyer. They will search the title, check to see if there are liens and work orders against the property, and they will handle the transfer of funds. They will also register the mortgage at closing. This is usually the person who gives you the keys for your new home. In the United States, this is done by the “Title Company”.
Mortgage brokers may charge you a fee for putting together the mortgage. This may either be incorporated into the actual mortgage, or be charged as a Closing Cost. This could be as much as 3%. More Common when the Broker is dealing with Hard Money Lenders, rather than with Banks. Ask before you sign anything.
Appraisal fee – Your mortgage lender may need to have your new home appraised by a professional. His means the services of an Appraiser. This has become a more common expense with the rapid rise in house prices. His service for a house can range from $300 to $500.00. For income properties, it can go into the $1,000.00 or more range. Sometimes your lender will waive this fee. Again, it doesn’t hurt to ask.
Land survey fee – Lenders may require a survey of your property. This is quite common for farms and cottages. It can typically cost between $600-$2000. Lenders will often accept an existing survey. Once you have an accepted offer get the real estate agent to ask if there is a survey available. I have had a survey I did accepted. I did the drawing and the measuring and took photos of the survey stakes. When ever I look at a property, I do my best to find the survey stakes. These are usually one inch square steel stakes, driven into the ground. It is crime to move a stake. You may have to look real hard to find them.
Home inspection fee – A home inspection is important, and today most lenders will insist on one. I have renovated and built over 30 properties. There was a time when my inspection was enough. Now, in most cases it must be an unbiased opinion. If you are not familiar with construction, plumbing, and electrical, avoid surprises and protect yourself by having a home inspection done. Just a small story. My son is a home inspector, and when he bought his last home he had to hire someone else. Costs are usually in the $300 – $800 range.
Home Insurance – Mortgage lenders require you carry fire and extended-coverage insurance because your home is the security backing the mortgage. You will need this in place as of the day of closing. Mortgage lenders require a certificate of fire insurance to be in place from the time you take possession of the home. The amount required is generally the amount of the mortgage or the replacement cost of the home. This cost can vary on the property size, amount of coverage, the insurance company and the municipality. The cost can vary anywhere from $1000-$3500 annually. This can often be combined with your auto insurance for a savings and can be paid monthly. So this might not be a large upfront expense, but will be an ongoing expense.
Provincial Sales Tax on Mortgage Insurance– If your mortgage is insured, you will be required to pay the applicable taxes on the insurance premium on closing. While the insurance premium can be added to the mortgage amount, the tax must be paid at closing. This expense is location dependant.
Title insurance – This is new in Canada and not mandatory, but it protects you from all sorts of fraud and potential errors surrounding the title to your land. It’s normally a few hundred dollars. Ask your lawyer for details. This is a normal cost in the United States.
Land Transfer Tax – Most provinces charge a land transfer tax payable by the buyer, and is based on the purchase price. First time home buyers purchasing a new home may qualify for a refund or exemption. Ask your agent or lawyer for details. In Ontario Land Transfer Tax is calculated as follows: .5% for first $60,000, 1% for next $60,000 to $280,000 and 1.5% for portion over $280,000.
Closing Adjustments – The previous owner may have paid property tax, or utilities, in advance, and they want to be credited for those payments. Any bills after the closing date are the responsibility of the purchaser. A lawyer will let you know what the costs are once the various searches have been completed.
Closing costs can be a major expense. You need to budget for them. They will either come out of the money you have saved or they need to be an extra amount over and above your down payment money.
Because there are different rules in different areas, these are not all the potential costs. Ask your agent, lawyer, or title company about which costs are common where you are buying.