Buying a home is the most significant financial decision that many individuals will make. While buying a home is exciting, there can be many uncertainties and stresses that arise during the process. Below is some information and a few tips for first-time homebuyers to keep in mind when buying or considering buying their first home. This post only covers a small portion of the many considerations that form part of the home buying process. Please feel free to contact the author or another real estate lawyer for further advice and guidance.
Find your lawyer early in the process
The majority of residential real estate transactions are handled by realtors and do not make it to a lawyer’s office until the purchase contract has been signed and conditions have been waived. Once the contract is signed, it can only be changed if both parties agree to the change. Generally speaking, it is more difficult to negotiate a change after the contract is final.
Issues often arise during the purchasing process and a lawyer’s advice can be valuable. For example, there could be unusual registrations on title or issues with the condition of the home or property. A real estate lawyer can assist with negotiating changes or additional terms to the contract. Depending on your arrangement with the lawyer, it may not cost any extra to retain the lawyer earlier in the buying process.
Get your financing in order
The majority of home purchases are financed by a lender. Arranging for financing is possibly the most important step of the buying process. Financing can be obtained through one of the major Canadian banks, a private lender, or other sources (family, friends, or the seller).
Even if you are still searching for your new home, it can be valuable to explore different financing options to determine your budget and find a loan that fits your lifestyle. Home buyers can discuss mortgage options directly with their home bank or engage a mortgage broker to explore the various available options.
What is a mortgage?
A mortgage is the document that the lender registers on title to the property as security for repayment of the loan. The mortgage creates an interest in the property and allows the lender to enforce the mortgage and take possession and title to the property in the event the buyer does not repay the loan.
The mortgage will require the buyer insure the property and name the lender as first loss payee. A buyer is required to provide proof of the property insurance before the loan is advanced.
Usually, the mortgage will be signed at your lawyer’s office as there are specific legal requirements that must be followed.
If your down payment (the purchase price less the loan) is less than 20% of the purchase price, mortgage default insurance is required. Mortgage default insurance is paid by the buyer and protects the lender in the event the buyer is unable to or fails to make the required repayments. The mortgage default insurance premium is calculated based off of the purchase price and down payment, and can be significant.
The premium is usually withheld by the lender, meaning the lender will pay for the insurance premium directly and the amount of the premium will be included in the buyer’s loan and repaid by the buyer over time through regular mortgage payments. There are plenty of calculators available online that can be used to determine the default insurance premium.
In the majority of real estate transactions, the purchase price will be adjusted as of the possession date. This means that the amount the buyer pays on closing will be increased or decreased based on financial obligations related to the property that have been over paid or are outstanding.
The property tax adjustment is usually the most significant adjustment. Property taxes are assessed for the calendar year and are payable in the summer.
- If the seller has not yet paid the annual property taxes (for example, if possession is in the spring), the buyer receives a credit for property taxes attributable up to and including the possession date, and the amount payable on closing is reduced accordingly.
- If the seller has paid the annual property taxes, the seller receives a credit for the period attributable to after the buyer takes possession, and the amount payable on closing is increased accordingly.
Other adjustable items include the deposit(s), rent, home owner association fees, and local improvement levies. Your lawyer will prepare a statement of adjustments that will set out the exact amount due on the possession date. This amount is commonly referred to as the Cash to Close.
Budget for Closing Costs
You have been approved for a mortgage and have the Cash to Close ready.
Unfortunately, that is not enough to get the keys to your new home. There are additional costs you will incur in order to complete the purchase, including legal fees, and costs associated with insurance, utilities and moving.
Legal costs can vary greatly depending on which lawyer is retained, the value of the property, the complexity of the transaction, and many other factors. Some lawyers will charge a flat fee and others will charge hourly rates. In addition to legal fees, the buyer is responsible for costs the lawyer will include on behalf of the buyer, including fees charged by the Land Titles Office for registering the title transfer and mortgage.
Your lawyer should be able to provide you with an estimate of legal fees and disbursements so that you can budget accordingly.
What actually happens on the possession date?
In advance of possession, the buyer’s lawyer will request payment of the shortfall, which is the difference between the cash to close and the mortgage advance. Often, the lawyer will also require advance payment estimated of legal fees and disbursements.
On the possession date, the buyer’s lawyer will request and obtain the mortgage advance from the lender and will pay the cash to close to seller’s lawyer to complete the purchase. Once the cash to close is received, the seller’s lawyer will confirm that keys can be released to the buyer.
If the seller has a mortgage on the property, the cash to close will be paid on the condition that the seller’s lawyer must use the funds to payout and discharge the existing mortgage. Following payment and possession, the title transfer and new mortgage are submitted to the Land Titles Office for registration. Once registered, a new certificate of title is issued showing the buyer as owner and registration of the lender’s mortgage.