Definition of Closing Costs
Closing Costs are fees incurred in completing your real estate transaction.
Closing Costs may be charged by your bank or mortgage company, a government entity, the buyer, seller or a third party. Because real estate transactions can be complex, there are usually a number of additional costs, beyond the purchase price of the home and the monthly payment of the mortgage.
The Canadian Mortgage and Housing Corporation (CMHC) recommends at least 1.5% of the purchase price be set aside for closing costs in addition to the down payment. Depending on the services needed or desired, 2.5% may be a safer figure.
Types of Closing Costs
Here is a list of the different types of closing costs you might come across when buying a property. Different provinces have different ways of doing things, this list is meant to be a good start but not ever fee is applicable in every situation.
Please feel free to contact us anytime to discuss your closing costs!
Land Transfer Tax
The province in which the home is located in will charge a tax to transfer the deed into your name. This fee will vary depending on the province and the fair market value of the home. It can range from 0.5% to 1.5% of the purchase price of the home.
Mortgage Application Fee
The bank or mortgage company may sometimes charge a fee for processing a mortgage application. This type of fee is more common when your down payment is less than 20% of the total purchase price. It is usually a few hundred dollars and varies between financial companies.
Mortgage Insurance Fee
If you borrow more than 80% of the purchase price of the property, mortgage insurance is most likely required. Mortgage insurance is to protect the lender against you defaulting on the loan. The mortgage insurance is paid by you, but the insurance policy is to protect the financial company, not the purchaser. Mortgage insurers in Canada include CMHC, Genworth Financial, and Canada Guarantee.
An appraisal provides the lender with a professional opinion of the market value of the property. It is usually required for new homes. It can cost between $100 – $300. Often the home builder will pay this fee and factor it into the purchase price. It is more common to require an appraisal when there is no Mortgage Insurance involved.
Land Survey Fees
A land survey is a process where a surveyor will inspect the property to ensure that boundary lines in the title to the property are being followed. Using the legal description of the property and specialized surveying instruments, the surveyor will measure the land and note the boundary lines. If the land survey is out of date, the lender may require a new survey. Usually, a financial company will accept a recent survey. Often, the seller will pay for this service.
Title insurance will check the title history of the property to determine if there are items that could affect your interest in the property, such as outstanding liens, taxes, or unpaid judgments. The financial company may require a title insurance policy to reveal potential errors before the mortgage is issued. A seller may pay for a title policy issued to the buyer, and the buyer will pay for any policy issued to the financial company. Title insurance can also be used as a substitute, if both parties agree, to a recent survey because Title Insurance protects the lender and buyer against defects in the title.
Most Realtors recommend that you obtain a home inspection and make your offer to purchase subject to an acceptable inspection. A home inspection can reveal problems with the property such as mold, mildew, structural problems, electrical problems, infestations or problems with the HVAC system. The cost for a home inspection is usually around $400—$500 and is borne by the buyer.
If you retain a lawyer to assist in the closing of your transaction, the lawyer will charge you a fee, which is often billed separately. The fees will range in price, depending on the services provided.
Property taxes and utilities may be prorated to the date of closing, depending on whether they have been paid in full prior to the closing date or are unpaid.
These are some of the potential fees related to closing on a real estate transaction. Your closing may have additional costs. It is best to calculate these costs prior to closing and set aside the necessary funds in advance. Any of the mortgage professionals at First Foundation will be happy to explain the closing costs you may expect in your real estate transaction.
If you are interested in learning more about closing costs, please feel free to contact us today!