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I got an unwelcome surprise in the last few days before my first home purchase was completed: The closing costs would be higher than I expected.

After lawyer fees, adjustments to tax payments, and a couple other unexpected costs, I was short by a few thousand dollars. I had the money, but it was tied up in investing accounts that I couldn’t access before the closing date.

In the end, I used my credit card to get a cash advance and my mother lent me some money. I managed to take out a bank draft just minutes before the branch closed on the last business day before my closing date (the date that the money is actually exchanged in a home sale). I paid off both loans the following week when I was able to withdraw funds from my tax-free savings account.

It was a last-minute dash, and one I could have avoided with better planning. But I’m not the first rookie buyer to make that mistake.

John Aruldason, a Toronto-based real estate lawyer, says it’s not uncommon for first-time buyers to be ill-prepared for closing costs, which are separate from a down payment and cannot be tacked on to your mortgage.

These costs generally cover land transfer taxes, lawyer fees, lender fees, title insurance and any adjustments for condo fees or property taxes. The standard industry estimate is that closing costs will amount to roughly 4 per cent of the total home cost, but Mr. Aruldason has seen closing costs balloon to double that in some cases.

Those expenses have nearly derailed purchases in his experience, especially during the pandemic when markets rose rapidly and people continuously pushed their upper spending limit higher without considering the effect on other costs.

“If a sale was to fall through because of closing costs, it opens up the buyer to a world of pain,” Mr. Aruldason said.

If you fail to close on a home purchase, you not only lose a deposit that could be tens of thousands of dollars, but could also open yourself up to being sued by the seller for any losses they faced in the process, such as a drop in the value of their home.

I was purchasing a small condo in a very small town, so the miscalculation in what costs I would be facing was a modest amount. But for million-dollar homes, the expense can balloon to exorbitant amounts that a credit card couldn’t cover.

Mr. Aruldason says the best way to avoid being surprised at the last minute is to start a dialogue with a real estate lawyer early.

Closing costs vary in each municipality. For example, Toronto has its own land transfer tax on top of the province’s. Meanwhile in B.C., qualifying first-time buyers are exempt from land-transfer tax.

In my earlier columns, I mentioned that speaking to mortgage specialists early is key to ensuring a smooth closing process. This is also true when it comes to figuring out what your closing costs are. That’s because lawyers can’t calculate your exact closing costs until they have the final instructions from your mortgage provider. Submitting all your required documentation to your mortgage provider as quickly as possible could help them send those instructions sooner, Mr. Aruldason said.

In my case, my mortgage took unusually long to get approved, and then there were delays in getting the mortgage provider’s documents sent to my lawyer’s office. That’s why I only learned about my exact closing costs a couple days before the date of purchase.

And a word of warning for anyone making a preconstruction purchase: Mr. Aruldason says to be very careful to note how the builder is allowed to transfer unforeseen fees. He says he has seen closing costs balloon by tens of thousands of dollars for preconstruction purchases, because if the builder faces unexpected permitting fees or other costs, they can be passed on to the buyer.

Today, I’m happily settled into my new home. But knowing about how mortgage closings work could have saved a lot of running around

Key Takeaways:

  • Speaking to a real estate lawyer early is the best way to get accurate estimates on closing costs. Remember that those costs can vary from city to city.
  • The sooner you satisfy your mortgage provider’s conditions, the sooner they can send closing instructions to your lawyer to provide exact closing costs.
  • Take extra care when buying preconstruction homes. Builders can tack on unforeseen costs during closing. See whether your contract can put a limit on those costs.

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