So What Exactly is "Closing" on a Home?
If you’ve been following my real estate series (Part 0, Part 1, and Part 2), then you know that this is the conclusion. In Part 3, I will be detailing my buying experience but also the process of “closing” and what that actually means. When I was doing my initial research on buying a home, I felt that most sites don’t tell you all the extra fees you have to pay or it didn’t give a realistic picture of the whole process. In this post, I wanted to be as transparent as I could so that it could help others who were in the same position as me or for those looking to buy their first home in the future. I hope you enjoy the conclusion to the real estate buying saga!
The Art of Negotiations
*Disclaimer: I will not be posting exact dollar amounts but the increases and decreases are accurate
When we left off, I had gone to my first two viewings, loved the first place (as did my partner), and decided to make an offer. Here is where you need to have absolute trust in your real estate agent. My agent looked at all the properties that were sold in the building that were comparable to the one we liked and felt that the list price was too high. Based on his recommendation, we went about 40k under asking as our initial offer. We also asked our agent if it was possible to add a condition of finance onto the offer before submission. Our agent spoke with the seller’s agent and they agreed to the condition of finance. Once the offer is submitted, the seller has the option to either reject the offer outright or sign back with a counter offer. We felt comfortable going that low under asking because we knew that the unit had been on the market for about 12 days, which was unusually long for a condo. We also knew that no one else had made an offer at that point.
The sellers signed back with lowering their list price by 2k. My partner and I were hoping that they would’ve lowered the price a bit more, as we still really loved the unit. We decided to counter again by adding 30k to our original offer to meet them more in the middle. At this point, my partner and I were nearing the top of our budget and we couldn’t really afford to go much higher if the seller decided to counter the offer again.
The seller countered again...this time lowering the price to about 5k under the list price. My agent advised us to take the deal because the sellers weren’t lowering their list price by much in the previous negotiations. My partner and I had to make a tough decision because adding another 5k (which is what the seller’s were asking) was going beyond what we had decided was our maximum. With the condition of finance we had a bit of a safety cushion because that meant that, if we couldn’t secure financing at a bank or get a low enough interest rate, we could step away from the transaction with no penalty. We crunched the numbers again and we knew that, depending on the rate of the mortgage, our budget was going to be extremely tight for the first few years. We knew that it was a concession we were willing to make in order to buy a home we both really loved. We accepted their offer and immediately the wheels were put in motion.
Side Tangent
Before we continue, I did leave out one crucial part of the negotiations. Every sign back or counter offer has a time window attached. In my case, the sellers usually needed an answer back within 4 hours. It is important that all parties involved with purchasing the home are on the same page about price. 4 hours doesn’t leave a lot of time to think things over so make sure you are confident about what you want the limitations you have.
I would also like to note that having a condition of finance is uncommon with condo purchases. Usually sellers will not accept this condition because it delays the sale and there is the possibility that the buyer can back out. As a buyer, it is within your best interest, especially if it’s your first home, to have a condition of finance. Just know your offer may get rejected from the seller because of that condition. The only time I would consider not having a condition of finance is if I had a firm approval from a bank on the amount I could borrow and that the home was at the lower or mid point of my budget.
Condition of Finance
Side Note
You have to be able to prove that you have the down payment and closing costs (banks define this as ~1.5% of the purchase price) in your bank account(s). You do this by handing in a 90-day history of your bank account activity; if the money hasn’t been there for that length of time and especially if you have large deposits on your record (10k or more), then you have to prove where they came from. If some of it was a gift from family, they need to fill out a gift form that verifies it is a gift and not money with nefarious origins.
Once we accepted the offer and signed the papers, two conditions were immediately activated. We had to hand in a deposit of 25k to the seller’s real estate office (I got into more detail about this in Part 1) within 24 hours, and we had three days to figure out financing. Luckily, we were referred to a mortgage broker, David Hogg, through Condos.ca (I will touch on this more in my Condos.ca review). He took care of everything. The amount of effort he went through to help us, especially with a tight closing window, is why I highly recommend mortgage brokers. I couldn’t imagine negotiating rates with banks, shopping around on my own and getting everything done in time. He also ended up getting us a rate that is far below what the banks were offering and we didn’t have to pay anything extra for his services!
The condition of finance is also a time-sensitive issue so it’s important that you hand in the requested paperwork ASAP. In our case, we had two options. We had a firm offer from Scotiabank and we were waiting on a lower mortgage rate offer from Meridian Credit Union. We wouldn’t have gotten the Meridian firm approval in time because they had a wait of about 10 business days. However, since we had a firm approval from Scotiabank that we could afford, this satisfied the condition of financing.
The main point to take away from this is that you don’t need to lock into a mortgage. You just need to prove that you have a firm approval from a bank or other institution (this is different from a pre-approval) that you can afford.
With the condition of financing satisfied and the deposit received, thus began the “closing” phase.
Closing
When I heard of people “closing” on a house, I wasn’t really sure what that meant on a technical level. I thought that, during that time, your paperwork is going through and your down payment gets paid and that’s about it. I was wrong. Very, very wrong. There are three main things that happen during closing:
1. Lock in Your Mortgage
At this point, you actually have to sign your mortgage agreement, work out payment schedules etc. before you gain possession. The only advice I have for this is:
a) to make sure you read and understand your mortgage terms inside and out. In our case, the mortgage agreement stated that we had to have the agreement completed 10 days prior to closing.
b) do your research on the best payment method for you.
I am fortunate to have an actuarial friend (you know who you are ;) ) who made me the most beautiful mortgage amortization schedule on steroids. She also did a breakdown of how much interest you’re saving between a monthly, bi-weekly and weekly payment schedule. The difference between all three in my situation worked out to be a savings of 5k or less over the 25 year amortization period which when you compare it to the original price of the home, is negligible.
The main focus should be your work payment schedule. If you get paid twice a month and it lines up with your mortgage schedule, then you may want to opt for a bi-weekly schedule. If you get paid monthly, then a monthly schedule may be more manageable. This also doesn’t take into account lump sum payments. You could opt for a monthly payment schedule and then add an extra lump sum payment at the end of each year, which may save you more interest in the long run than the weekly option.
*An exception to this rule is a special accelerated payment option which will result in you paying your mortgage faster thus reducing the amount of interest paid
2. Securing a Lawyer
You will need a real estate lawyer in order to complete your closing. They are in charge of transferring the deed to your name, handling the down payment transaction, handing you the keys to your new home, and providing legal representation if the transaction goes south (they do more than this, but this is the jist). My real estate lawyer was also referred to me through my real estate agent and it’s been a pretty smooth transition.
They will also require paperwork from you to comply with government regulations but also the conditions from the condo building. In our case, the condo building that we are moving into requires that we show proof of fire insurance, so if home insurance is not built into your mortgage terms, then that is something that you need to include in your budget. Most of the time you can get a deal on home insurance through your work or by bundling your car or other types of insurance together.
3. Contacting Building Management (this is for condos specifically)
You are in charge contacting the building manager to let them know that you are a new home owner in the building. In doing so, they should send you a whole bunch of forms to fill out but also a list of condo rules. You will need to fill these forms and set up an account with them in order to: book the elevator for when you move; setup a pre-authorized debit form so you don’t have to pay for condo fees by cheque; get an extra door fob if you need one; and be informed of all the rules and procedures pertaining to the condo building.
Once that is all done, you collect your keys on your closing date and then your home is officially yours! Congrats!
