Posted by: Daryl & Wendy Ashby | November 2, 2010

Do You Have Closing Costs ?

While securing a good mortgage deal is a priority when buying your first house, be sure to have enough money to cover the extras as well.

Once you have set aside a minimum of 5% for the mortgage down payment, you will need to budget for closing costs.

For those purchasing a home in Victoria, the land transfer tax can add significantly to these costs. However, the good news is that if you really are a first-time buyer — you must not have owned a home anywhere in the world, and nor can your spouse, while being your spouse, have owned a home — the you may be exempt ther land transfer tax.

“As a first-time homebuyer, if they’re falling under these exemptions of the property transfer tax then their closing costs should not be more than $1,500 or $2,000 on the high side,” says Cara Savege a mortgage broker with Invis in Vancouver.

As well as legal costs, Ms. Savege says that if there is no survey of the property available from within the last couple of years, many lenders have started to require you to buy title insurance, which, she says, can be around $250 for a condo but as much as $500 for a house.

If you are putting less than 20% down, your mortgage will need to be insured. Obtaining this insurance will require payment of an appraisal fee.

“Appraisal fees, if you’re putting down less than 20%, typically are about $265,” Ms. Savege says. “A lot of people have home inspections. These aren’t necessarily what we would call a closing cost, but it’s a cost involved that is typically out of your pocket.”

She adds that you will also need to compensate the seller for any prepaid bills that cover the time after your move-in date. These would include property taxes, condo fees and utilities.

Ms. Savege says when budgeting for your new home, you will also need to be ready to pay home insurance, the cost of physically moving yourself and your belongings to the new place, plus cable and hydro hookup, etc.

Once you have added up all the extras, there are a number of ways to pay for it all. If you have more cash than the 5% down payment, then Ms. Savege says you can put down a smaller (but still 5% or more) deposit and use the remaining cash to pay closing costs.

“As long as there is 5% [down payment], the closing costs can be from a borrowed source as long as it qualifies in the ratios that are acceptable to the qualifying of the mortgage,” says Ben Melick, a mortgage broker with Mortgage Intelligence in Kitchener, Waterloo, Ont. “The ideal way would be to get it possibly in an unsecured line of credit … not everybody is going to qualify for that, it depends on the client, their income, credit and repayment history.”

Mr. Melick says that borrowing for closing costs is not suitable for everyone and he would only recommend it for clients who have stable employment and whose income will likely rise. He says that clients must be comfortable with budgeting for these additional payments.

“It’s important consumers understand what they’re getting themselves into. It’s probably the biggest transaction of their life to this point,” says Peter Vukanovich, president and COO of Genworth Financial Canada in Toronto. “They really want to make sure that they have some room in their budget to live and enjoy the house that they purchased. It’s not all about an investment; it’s as much about a place to live and call your home.”

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