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If you think the down payment amount is all you need to close your house purchase, you need to think again.
In addition to your down payment, mortgage lenders are required to validate that you have additional financing to pay for the legal and administrative costs of closing on your house purchase. These other financial requirements are called Closing Costs.
As you plan to buy your dream home, it’s essential that you know the potential fees associated with buying a house in Canada to help prevent any surprises when the time comes for settlement!
Closing costs are fees you will need to pay when your mortgage transaction closes. Some fees are required whenever a real estate property changes hands, while others only come into play when financing an exchange with a mortgage.
For example, closing fees in Canada range from 1.5% to 4% of the house value. As such, closing costs for a $500,000 house could range from $7,500 to $20,000 based on the variables at play.
Most of the closing costs are paid by the buyer, but in some cases, for example, a negative outcome on a home inspection, the seller could also incur additional expenses.
The loan origination fee covers the cost of setting up your loan. Alternative- or B-lenders generally charge this fee to cover the administrative costs of originating the mortgage loan. There is no standard rate for this fee, but it is usually 1% to 2% of the loan amount. Private mortgage lenders can go up to 6% of the loan amount.
Lawyers charge this fee to conduct the required searches to validate the legal ownership of the property. A title search involves examining public records to determine the ownership history of the property as well as all the claims and liens registered against the property.
It is essential to know that you are the sole owner of your property and there is no hidden lien that will affect the ownership of your new property. Lenders also want to make sure no factor will affect the collateral of their loan, which is the subject property.
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Title insurance is another cost you’ll incur if you plan to get a mortgage for your new house. Title insurance protects you and the mortgage lender against loss due to title defects. It also covers you against title fraud, forgery, encroachments, zoning non-compliance, and easement of your new house.
In general, title insurance protects you against challenges to your homeownership or problems related to the title to your home. Your lender will need this insurance in place before closing on your mortgage.
Learn More: Title Insurance: Everything You Need To Know
You need a lawyer to close and register your mortgage. The lawyer ensures you are fully aware of your rights and responsibilities in the mortgage contract.
The lawyer will also conduct all the title searches and registration and disburse the funds to the parties (seller, real estate agent, and others). The fee charged by lawyers varies quite a bit from one deal to the next, but you will probably pay between $1,500 to $3,000 on average.
A home inspection is optional when buying a house, but it is highly recommended. A qualified inspector will thoroughly examine the house and highlight all potential home inspection issues. Depending on the size of the house, a home inspection can cost anywhere between $500 to $1,000.
Land transfer tax is charged by the government and sometimes the city when a property changes hands. The amount you pay depends on the province, territory and city where the property is located.
Learn More: Land Transfer Tax In Canada
You will need to pay a mortgage default insurance premium if you buy a house with less than a 20% down payment. Mortgage default insurance protects the lender if you can’t make your payments and default on your loan. The cost of the mortgage insurance is based on your loan-to-value ratio. The fee is usually included in your mortgage payments.
Learn More: Mortgage Default Insurance (CMHC Insurance)
Your lender may need you to set aside monthly money for property taxes. This usually comes from a separate bank account reserved exclusively for monthly property tax payments.
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Your lender will want you to get fire insurance on the property at closing if you take out a mortgage to purchase a house. Fire insurance, commonly known as homeowner’s insurance, protects not only the building of your home in the event of harm but also your personal belongings. Fire insurance must be obtained and maintained before closing; however, it is continuous and paid yearly or monthly installments afterward.
Your lender will likely require an appraisal report to confirm the property’s market value. Lenders have a list of their approved licensed appraiser officers. They often guide how to go about ordering the appraisal to be completed. Appraisal reports usually cost between $400 to $800.
However, many of the expenses listed are typical up-front expenditures to consider. Legal fees, a down payment, an inspection of the property, and an appraisal fee are just a few of the regular up-front expenses that might occur when purchasing a home.
Finally, if your closing costs come to more money than you initially thought they would, don’t despair!
You may negotiate with the seller or ask your lender if it can lower your closing costs. If not, you can always try refinancing later when interest rates have fallen.