I hope you enjoyed Part 1 of this series. So far, I’ve covered two of the most important terms you need to know – interest rates and mortgage terms. This week I’m going to cover:
- Pre-qualification or pre-qualifying for a mortgage
- Closing costs – this covers several different costs
1. Pre-qualification
Before looking at houses or condos, you need to go to a lender (such as a bank or a credit union) and get pre-qualified (sometimes referred to as pre-approved.). When you do this, you can find out the maximum amount of mortgage you (and your partner, if you are buying a house together) qualify for. You can also determine what interest rate the lender will give you.
There are several advantages to pre-qualifying for a mortgage:
- You know in advance what price range you should be looking for when house shopping.
- You can get an idea of your mortgage payments and how they’ll fit in your budget.
- You can “lock” in an interest rate for up to 120 days, which protects you if interest rates go up. If they go down, you can take the lower rate instead!
For a lender to agree to pre-qualify you, you’ll need to provide them with the following information:
- Details about any assets you have (e.g. a car) as well as any debts (e.g. car loan)
- Proof of employment
- How much of a down payment you’ll have
- Proof you can afford costs outside the mortgage, such as closing costs (more on that soon!)
Once you are done pre-qualifying and have all the necessary information, you’re ready to start house hunting! Remember that it’s best not to buy a house for the maximum amount approved, as this can leave you “house poor.”
2. Closing costs
The term “closing costs” refers to the fees you must pay to finalize your home purchase. These are the three main ones:
- Land Transfer Tax. If a property is transferred from one person to another (basically, someone sells a property, and someone else buys it), then the buyer must pay a land transfer tax. Some locations, such as Toronto, have two land transfer taxes – a provincial one and a municipal one. The land transfer tax is a percentage of the price of the property. They vary across Canada – anywhere from 0.5% and 2%. Alberta and Saskatchewan do not charge a land transfer tax but have land title transfer fees.
- Legal Fees and Disbursements. Buying a house is a legal transaction, so you will have to get a lawyer involved. Your real estate agent will most likely have one they work with regularly. You’ll have to pay for preparing and recording various official documents. Depending on how complicated your real estate transaction is and where you live, you may pay as little as $500 or up to $3000.
- Title Insurance. You need to buy title insurance to protect yourself against a loss if there is a property ownership dispute over your house. This will typically cost a few hundred dollars. You’ll also have to pay for a title search – this is done to ensure that a) the person selling the home has the legal right to do so and b) there are no issues with the home (such as a lien on it).
I hope you’ve enjoyed learning about mortgage terms. It’s essential to pre-qualify before you start looking for a home to have a reasonable idea of how much you can afford. Happy house hunting! Let me know in the comments how you’ve found house hunting!
