Through the stages of development of your pre-construction condo, perhaps the most crucial is the transition from interim occupancy to final closing. The most important of the moving pieces to have in place during this transition is your financing.
During interim occupancy, you are technically an “occupant” and your rights are governed by the Condominium Act. The payments that you are making to the builder during this period consist of maintenance or common expenses, vacant land taxes, and installments of the unpaid balance on the purchase price of your condo. The moment the developer registers the building, the unit officially transfers to your ownership. This is called final closing. At this time the remaining balance must be paid in full to the developer in order to retain your condo.
First and foremost, you need to ensure that your financing is secured and your lender is ready to fund.
Your mortgage broker is responsible for making sure you have obtained a firm approval from the lender. This is much different than the pre-approval that you got back when you first made the purchase and paid the first installment of your deposit or downpayment. The developer most likely required a pre-approval letter from you during this first step and now this needs to become a firm approval.
The difference between a pre-approval and a firm approval is essentially the level of commitment on behalf of the lender. In most cases when you are issued a pre-approval, there has only been a surface level investigation into your financial situation. The two main concerns of the lender are your income and your liabilities.
Your income aspect is relatively straight forward. If you are a salaried employee, the lender will want to see a job letter confirming your salary, and your two most recent pay stubs that support that figure as well. They may even go as far as to ask for recent bank statements showing those same pay stubs being deposited into your account, and your most recent NOAs and T4 statements. As an employee who gets paid hourly, you will need to provide a job letter stating guaranteed hours and corresponding pay stubs.
Your liabilities include any monthly expenses you have other than insurance. This could include credit card payments, car payments, student loan payments, any other loans or lines of credit you may have, or mortgage or property tax payments if you own other properties.
Now, when you are first issued a pre-approval, the lender most likely took into consideration the figures that you declared when you first met with the bank or your broker. Should any of this information have changed, or be incorrect, the lender reserves the right to not firm up the approval.
The way to prevent any complications when final closing approaches is, 1) Be as accurate as possible when applying for your pre-approval, and, 2) ensure your broker or bank is processing your approval several weeks in advance of your closing. Working with a trustworthy and experienced mortgage broker is the best way to ensure that this process will go smoothly. A good broker will be in touch with your lawyer regularly, and when the developer contacts your lawyer with the final closing date, your broker will go to work getting you approved. Once the lender’s conditions are satisfied, the funds will be transferred into the lawyer’s trust, and in turn to the developer in order to settle the purchase of the unit.
Another issue that pre-construction buyers run into when final closing approaches is not having enough put away for all of the closing costs. These include:
Land transfer tax - this is an expense that is incurred when purchasing property. In the City of Toronto, there are two applicable land transfer taxes (provincial and municipal), whereas in most other areas of the province, there is only a provincial tax applied. As a first-time home buyer, you are eligible for a rebate on land transfer tax, depending on the purchase price, up to $8,475 in Toronto and $4,000 in other areas. It is important that you know what the land transfer tax amount is on your purchase so you can have that money put aside for your closing.
Legal Fees - your lawyer will charge you for their services during the purchasing process. Usually this is a flat fee plus the cost of disbursements (transferring the funds) and can range anywhere from $1500 to $2500. It is important that you know what costs will be incurred by your lawyer’s administration of the transaction so that you can have that payment ready, or is considered in the mortgage amount.
HST Rebate - one of the most often overlooked potential costs that arise at final closing is the payment of the remainder of the HST if you or a blood relative are not living in the unit for at least a year after closing. In all cases, the purchase price stated in the Agreement of Purchase and Sale of your pre-construction condo takes into account the assumption that you are eligible for the rebate. What this means is that if you are not eligible for the rebate (you or a blood relative will not be living there for at least a year after final closing), you can expect to pay the remainder of the HST at final closing. The rebate amount depends on the purchase price, but the maximum is 36% of the federal portion and 75% of the Ontario portion, meaning a total maximum payable of $32,300.
Other Costs - these include Tarion warranty (as much as $1,000), occupancy fees and common expenses for the remainder of the last month of occupancy, reserve fund costs (usually equivalent to two times the common expenses), realty taxes (for the remainder of the year), transaction levy for the legal administration (usually under $100), administration of the deposits (usually $250 + tax), status certificate ($100 + tax), discharge fee for your unit’s portion of the developer’s mortgage (usually under $200), any internet/cable/heat/water monitors or connections that apply to your unit (as much as $2,000), and there may also be a charge for using any kind of electronic document submission portal ($250 + tax).
All of the above mentioned costs, with the exception of the legal fees and land transfer tax, will be outlined in a breakdown that will be provided by your lawyer in advance of closing called a statement of adjustments. This document shows the expenses that are credited to the purchaser and the vendor in order to determine the final amount owing upon closing.
It is important to ensure that you have enough saved to cover these costs, or qualify for a large enough mortgage that you can borrow the amount necessary to satisfy the entire amount owing upon final closing.
The good news is that your Realtor’s commissions are paid by the builder, so that does not have to be factored into your closing costs.
Jacob Manishevitz is an experienced mortgage professional who lives in Toronto and funds mortgages all over Ontario with iBridge Capital. He prides himself on his industry and process knowledge, as well as the hands-on client experience that he provides to every applicant. As your Mortgage Matchmaker, Jacob brings an immense amount of positivity and vision to his business through mindful practices and guidance. He is also a passionate musician and an avid exponent of an active and healthy lifestyle. Check out more of his content and reach out with any questions on Facebook - Instagram - YouTube - LinkedIn