Closing a mortgage, the term for finalizing the agreement is an exciting period. You’re close to having your dream home. That final moment can be complex and closing your mortgage can include additional costs and fees. These are a standard part of the process, but not everyone might apply to your closing process. Some fees will be included in your mortgage while others will be an additional cost. We’ll explain what each of these costs is, what they’re for, and how much they typically cost.
The Necessary Funds for Closing Costs
Typically, even before the closing process can begin and transmitting mortgage instructions to the client’s attorney, banks mandate buyers to have a minimum of 1.5% of the purchase price accessible for covering closing costs (in addition to the deposit or down payment). To begin closing, evidence of availability of these funds will be necessary. This isn’t always the case, and it is important to note that there may be some instances where this requirement does not apply.
The deposit is part of your down payment for purchasing the property. This amount must be paid when submitting a purchase offer. The cost varies based on the location but can be as high as 5% of the purchase price. If you opt for a 5% down payment and provide a 5% deposit, the deposit is considered part of your down payment.
The down payment is the portion of the purchase price you pay immediately to secure the mortgage. For a conventional mortgage, typically, a minimum of 20% of the purchase price is required. However, mortgage loan insurance enables home ownership with a down payment as low as 5%. Lastly, in some cases, the lender may even allow you to borrow the down payment but it will typically negatively impact the buying power.
Mortgage Loan/Default Insurance Premium
If your down payment is less than 20%, you will have a high-ratio mortgage. In this case, your lender may require mortgage loan insurance. Payment for the insurance can come in two forms. The most common practice is for the mortgage insurance premium to be added to your mortgage. Alternatively, you may be asked to pay the premium in full as a fee during the mortgage closing process.
An appraisal is an approximation of a property’s value. As lenders are often cautious with regards to financial transactions, they engage independent experts known as “appraisers” to assess and verify a property’s value. Appraisers visit the property you intend to purchase and estimate its worth by comparing it to similar homes in the vicinity. An appraisal provides assurance to lenders that the property you intend to purchase is genuine and worth the amount you indicate. Typically, your mortgage lender may insist that the property be appraised at your cost (although this is usually not required for high-ratio insured mortgages). The cost of an appraisal is paid before the closing process and ranges from approximately $400 – $1000. The cost will depend on the property, the location, and the amount of research needed to determine the market value based on comparable sales.
An important cost in the closing process is the home inspection. Home inspectors assess the state of the property, verifying that the structure is stable, the heating is functional, and the water supply is potable. They also search for defects such as cracks, leaks, electrical issues, and other potential costly problems. Although it is not mandated by most lenders, hiring a home inspector is still recommended for the closing process to ensure that you are investing in a secure property. The cost of a home inspection ranges from approximately $500 – $750, depending on the property and the expertise/experience of the home inspector. For example, an inspector may have a background in engineering and will rely on that expertise to give you insights pertaining to the structural soundness of the property and may charge more for the enhanced level of service.
Buying a home includes numerous legal procedures and documents. Fees are paid to the lawyers who prepare, review, and finalize these documents for the mortgage closure. The fees typically range from $1,000 – $2,000 on a residential transaction and $2,500.00 – $5,000 + on a commercial transaction.
Land Registration/Tariff Fee
In certain provinces and territories, you may be required to pay a provincial or municipal fee at the time of closing to register the land title. The fee is calculated as a percentage of the property’s purchase price and may differ depending on the location. Typically, this cost is included in the lawyer’s bill.
Prepaid Property Taxes and/or Utility Bills
Your lawyer will include the reimbursement for the vendor’s or previous owner’s prepaid expenses, such as property taxes and filling the oil tank. Since these become your responsibility at the point of sale, your lawyer will add these in the final bill and allocate them accordingly. This is done on a “Statement of Adjustments” and usually applies to purchase transactions.
Property or Home Owner’s Insurance
Homeowner’s or property insurance differs from private mortgage insurance, which is required by the mortgage lender because the home serves as collateral for the mortgage. Homeowner’s insurance instead covers the expenses of replacing your home and its contents in case of damage or loss. Property insurance must be active on the day of closing and provides protection against fires, floods, and other disasters. Generally, lenders mandate that some form of property insurance be obtained, and you will be required to provide evidence of insurance at your appointment with the lawyer. As the owner of the property, homeowner’s insurance will also be in your interest to protect your new property from such damages. The cost of homeowner’s insurance ranges from approximately $1,500 – $2,500 per year depending on the property type, the policy, and the coverage you choose. If required by your lender, you will need to purchase it for closing.
Before you become the owner of a property, it may have had various owners, including banks, the government, construction companies, and other individuals. A title search is essential to verify that you are the sole legal owner of the property and to identify any errors or issues that could lead to future problems. Lawyers are usually responsible for conducting the title search and will include the associated cost in their final bill. Typically, the fee is approximately $70 – $100 and is part of the solicitor’s disbursements.
Alongside mortgage and property insurance, title insurance safeguards your ownership rights by providing protection against losses resulting from defects in the property’s title. In the event that someone comes forward and claims ownership of the property, title insurance covers you for the full value of the property. For instance, if the previous owner’s child suddenly appears and makes a claim on the property, title insurance would reimburse the lender for the property’s value if the child were to win the case. It’s important to note that title insurance only covers the lender and not the borrower. You’ll need to arrange your own title insurance for such coverage. Typically, lawyers handle this and will add the cost to their final bill. The additional cost is typically $300 – $550 and is part of the solicitors’ disbursements.
Land Surveys/Real Property Report
(Not Applicable to Condominiums) A land survey is conducted to identify the boundaries of your property and determine if the trees, plants, and fences on the land are part of it. While not all lenders may require a land survey, it is typically the seller’s responsibility to cover the cost, subject to determination in the purchase agreement. Typically costs range from __________ to_________ . Water Tests If the home or property has a well, it is recommended to have it tested to ensure the quality and safety of the water supply. The cost of the test can be negotiated with the seller and specified in the Offer to Purchase. Lenders often require a copy of the water potability test for their records to close the mortgage. A test typically costs $ to $
Just like the well, a house’s septic tank should be inspected to ensure it is in proper working order. The cost for this inspection can be negotiated with a vendor and included in your purchase offer.
Estoppel Certificate Fee
While purchasing a condo or strata unit doesn’t need land surveys, water tests, or septic inspections, it does typically require an estoppel certificate. This is a certificate from the condo or strata board that confirms a seller’s statements and claims about a property. They typically cost up to $___.
It’s Worth the Costs and Paperwork
These various fees and costs may make closing your mortgage seem daunting, but it’s all part of the process. With Main Street Mortgages you’ll have our expert help to guide you through the process, so you can look forward to your future in your new home.