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Comprehensive Guide to Real Estate Closing Costs:
In the complex world of real estate transactions, one of the most crucial aspects for buyers and sellers alike to understand is closing costs. These are fees that must be paid at the closing of a real estate transaction, the point at which the title of the property is transferred from the seller to the buyer.Understanding Real Estate Closing Costs: An Overview
Real estate transactions can be fraught with hidden expenses, and the journey to understanding these expenses begins with familiarizing yourself with the closing costs.The Concept of Buyer Closing Costs
Closing costs encompass a variety of fees that buyers are expected to pay at the end of the real estate transaction. These costs typically include a slew of charges such as title insurance, legal fees, home inspection fees, and various taxes. It is essential for buyers to have an estimate of these costs beforehand to avoid any financial surprises.Detailed Explanation of Closing Costs
When embarking on a property purchase, it's critical to comprehend the nitty-gritty of closing costs. These costs are not a monolith but rather a combination of varied expenses, each with a distinct purpose and origin. While they might seem like a disarrayed assemblage at first, they fall into three broad categories: transactional costs, mortgage-related costs, and governmental costs. Transactional costs encompass the fees that go to the entities handling the transaction, including the real estate agents, attorneys, and inspectors. Mortgage-related costs arise from the necessity of obtaining a loan to purchase a property and can encompass origination fees, discount points, and appraisal fees. Lastly, governmental costs include taxes and recording fees associated with the transaction. Understanding these costs involves dissecting the diverse components, which may vary based on location, type of property, and unique attributes of the buyer or seller.Unique Closing Costs for Specific Buyer Types
Distinct segments of buyers may be subject to unique closing costs, considering the specifics of their purchase. For instance, buyers of newly constructed homes often face costs not applicable to buyers of pre-owned properties. These costs might include development and growth fees, often charged by municipalities to offset the infrastructure requirements of new residential areas. On the other hand, non-resident buyers might encounter additional expenses such as the Non-Resident Speculation Tax (NRST) in Ontario.Common Types of Closing Costs
Land Transfer Tax
When a property changes hands, the province of Ontario levies a land transfer tax (LTT). This tax is calculated on a sliding scale and is based on the amount paid for the land, in addition to the remaining amount of any debt or mortgage taken back by the seller You can calculate the Land Transfer Tax to your property by using our free Cost Calculator. Please check our extensive article with everything you need to know about Title Insurance.Legal Expenses: Lawyer and Legal Fees
Legal fees are an essential part of closing costs. Buyers need a lawyer to review all contracts, conduct a title search, register the new title, and prepare a statement of adjustments. Typically, legal fees can range widely based on the complexity of the transaction. You can calculate our Legal Fees on your transaction by using our free Cost Calculator.Home Inspection Fee
A home inspection, which costs between $300 – $500, is usually covered by the buyer. It is not mandatory but highly recommended as it reveals potential issues with the property.Appraisal Fee
With conventional mortgages (minimum 20% down payment), lenders often request an appraisal to confirm the home's worth. Appraisal fees, typically ranging from $350 – $550, might be partially or fully waived by the bank, depending on the negotiation.Title Insurance
Title insurance protects against potential property ownership disputes post-purchase. Priced upwards of $300, this insurance is mandatory, with the lawyer collecting the premium at closing.Property Taxes
While property taxes are an annual expense and not strictly a closing cost, you may need to pay a prorated amount at closing if the seller has prepaid the year's taxes. For instance, if you purchase a property mid-year and the seller has paid the year's taxes, you must reimburse the seller for the portion of the year they won't own the home.Uncommon Types of Closing Costs
CMHC Mortgage Insurance
In Canada, if you plan to buy a home with less than a 20% down payment, mortgage default insurance is legally required. This insurance, also known as CMHC Mortgage Insurance, protects the lender in case the borrower defaults on their mortgage loan. The premiums are typically paid in full at the start of the mortgage. Despite costing the average Canadian approximately 2.8% – 4.0% of their mortgage, it facilitates homeownership for individuals who might not otherwise qualify for a mortgage. A mortgage default insurance calculator can provide a better understanding of potential costs.Property Tax Adjustments
Property taxes, paid annually by homeowners, can vary in their payment schedule - monthly, quarterly, semi-annually, or annually. If the seller has already paid the property taxes for the year, you'll need to reimburse a prorated amount from the closing day up to the day they've paid in advance. This sum, found on the Statement of Adjustments, must be paid in cash on the closing day.Non-Resident Speculation Tax (NRST)
Implemented on April 21, 2017, by Ontario Province, NRST imposes a 15% tax on the purchase or acquisition of residential property within the Greater Golden Horseshoe Region by foreign individuals or corporations, or taxable trustees. This tax applies to properties containing one to six single-family residences, including detached, semi-detached houses, townhouses, or condominium units, and is in addition to the general land transfer tax in Ontario.Interest Adjustments
Interest adjustments accrue between the closing day and the day of the first mortgage payment. This may occur when the first mortgage payment is after the mortgage closing date, causing a period where interest begins to accrue. For instance, on a $250,000 home at a 2.89% mortgage rate, this would result in a total interest of $7,225. Dividing this by the number of days in a year gives a daily rate, which multiplied by the number of days between transactions provides the total interest adjustments due.GST/HST On New Construction Housing
New home construction doesn't require land transfer taxes but is subject to GST (or HST depending on the province). The builder may include GST/HST in the purchase price, allowing it to be financed with the mortgage. However, if not included, it becomes part of your closing costs. As these taxes can add up quickly, it's important to confirm how the tax is applied to avoid unexpected costs upon closing.Additional Closing Costs For Rural Properties
For rural properties, the lender may require testing of the well water and the home's septic system to ensure they are in good condition and there is ample potable water supply. Typically, the buyer covers this cost.The Closing Process: Before, During, and After
Pre-Closing Cash Outlays: Deposit and Home Fee for Inspection
A deposit is usually required when you make an offer on a home. This is to assure the seller of your intention to purchase. Other costs, like the home inspection fee, might also need to be paid before closing.Seller's Role in Closing Costs: Why Would the Seller Pay Closing Costs?
When selling a property, a seller's legal obligations usually cost between $500 and $1,000 and involve several key responsibilities: Title Search: The seller's lawyer conducts a title search to identify any unresolved permits, restrictions, or easements related to the property. If found, the lawyer proposes solutions to satisfy the buyer's requirements and settles these matters using the property sale proceeds. Letter of Direction: Sellers' lawyers also confirm any outstanding mortgages or liens against the property. They provide a letter of direction to the buyer's lawyer, specifying that sale proceeds will cover any existing debts and outstanding taxes. They also authenticate the property tax information for the buyer's lawyer. Statement of Adjustments: This document details the seller's prepaid or due expenses, such as condo fees, property taxes, or parking permits, at closing. For instance, if a parking permit has been paid for a year but the property is sold mid-year, the buyer will cover the remaining half. Closing Date: On the closing date, the buyer's lawyer transfers the sale proceeds electronically to the seller's lawyer. The lawyer uses these funds to clear any outstanding debts or mortgages. They then deduct closing costs, such as real estate commissions and lawyer fees, from the remaining balance and transfer the balance to the seller, typically within 24 hours of closing. In conclusion, sellers pay closing costs to ensure a smooth property transfer, satisfy legal requirements, settle any property-related debts, and pave the way for the buyer's ownership.Potential Post-Closing Issues: Document Errors, Credit Issues, Home Insurance, and Financial Difficulties
Even with careful planning, unforeseen issues can arise post-closing. These could be document errors like deed inconsistencies or incorrect property boundary descriptions leading to legal disputes. Credit issues may emerge, affecting mortgage payments, or home insurance difficulties may arise due to risk assessment discrepancies. Sudden financial challenges like job loss can also impact mortgage servicing. At Nazarian Law Firm, we apply our extensive experience to preempt and address these issues, diligently working to mitigate risks and ensure a smoother transaction.The Day of Closing: What to Expect and How to Prepare
On the closing day, the buyer and seller, usually accompanied by their legal representatives, convene to exchange documents, and keys, and finalize the property transfer. This is also when the buyer pays the closing costs and takes possession of the property. Collaborating with an experienced real estate lawyer from Nazarian Law will ensure effective navigation of these costs. Our team provides personalized consultations to help you plan your expenses and prevent unexpected financial surprises. Our aim is to make your real estate journey seamless, protecting your interests throughout the process.Let’s Get Started
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