What to do before closing

There are a few things you need to do before closing, and they all create a chain reaction.

The Mortgage Agreement:

As I mentioned in my other post, signing your mortgage agreement is a big deal. So we were very scared to sign this document. But eventually we did. About two weeks before closing. I suggest doing it slightly earlier.

Once you sign the document, the bank needs some time to process the documentation and will then release the “mortgage instructions” to your lawyer. Our lawyer wouldn’t start work on our file until the instructions were sent. This process took exactly one week.

Insurance:

At this point you should have insurance. If you don’t, the bank won’t release your funds, so it’s pretty important.

We had a hard time getting insurance thanks to our knob and tube wiring, so our insurance binder also came at the last minute.

Bank Draft

Once your lawyer receives the mortgage instructions and insurance binder, they start working on your file. Most of their work involves figuring out how much money needs to change hands and whether there are any issues with the deed. The actual work probably only takes a day or so.

Our lawyers received everything they needed exactly 6 days (or 4 business days) before closing and managed to get everything done (although not without complaining). I’ve heard that they really only need a day or two, although I don’t suggest testing this theory.

Once they complete their work, they will send you an email asking for a very large amount of money. This amount includes all of your closing costs (land transfer tax, any adjustments to the property tax, your lawyer’s fees and your remaining downpayment). You bring the cheque when you go in to sign all the paperwork, which is usually the day before closing.

Final House Inspection

You should make sure that your purchase agreement includes at least 2 visits. The first is to get a chance to really see your house (you don’t spend a lot of time there during the purchase time, unfortunately) and the second is to confirm that everything is in good condition.

Make sure that the house is generally debris-free (although expect some garbage and random crap around that you’d rather not have…) and that everything is in working order. The previous owner refused a weekend visit for us, so we actually had to have our final visit the night before closing. We weren’t happy about this, but the good thing was that she had moved out and we got to see exactly what we were getting. To our surprise, the house had been professionally cleaned (although still not up to my standards) and it was mostly empty. Given what we went through with her, we were pleasantly surprised.

Closing time

Then you actually “close.”

We went to see our lawyer the day before closing to sign all the paperwork. There’s a lot of it, so bring your best signing hand.

Then we got a fun little surprised. It turned out that the previous owner decided to take out a mortgage on our house 2 days earlier, known as a bridge loan. Bridge loans are temporary loans that bridge the gap between the sale of two houses. Normally this isn’t a problem, but the bridge loan was not with one of the big banks (we kept joking that it was with Harold the Jewellery Buyer or worse…)

And because it was with some sketchy mortgage lender, our lawyer refused to release our money. Except that the lender also wouldn’t release the funds until we did. A bit of a chicken and egg issue here…

The solution was to have the lender’s lawyer physically come to our lawyer’s office and essentially both release the funds at the same time.

Our house closed at 4:50pm on the day of closing. Not without a lot of stress, but it closed. I got the keys and headed straight to the house. It was finally ours! We celebrated with class: Champagne and take-out pizza.

And drank France’s finest Champagne…

Out of classy Ikea glasses…

All in all, not a bad day at all!

Pre-Approval

First of all, make sure that you get pre-approved before you start shopping for a house. As I’ve mentioned in other posts, this will help you establish your buying limit and also avoid any stress during bid time.

Research

I’ve done a lot of research on mortgages and I’m not sure I’m any less confused. I am, however, more terrified. I’ve read enough horror stories about collateral mortgages and penalty charges to make me want to rent forever (thanks, CBC). Or save up until I can just buy a house outright.

After a lot of research, I was able to find the basics online: closed v. open mortgages, fixed v. variable interest rates, and collateral v. conventional mortgages. I also asked around and, to my surprise, most people claimed they hadn’t done any research before signing and have no idea what advice to give. Some didn’t even know that they had a collateral mortgage.

So how do you confirm that you’re not getting royally screwed? Well, you can’t. But you can make sure you’re getting less screwed than just blindly signing on the dotted line.

Negotiating your mortgage

Most of the people I spoke to about their mortgage experience said the same thing: “We were just happy that someone was willing to give us a mortgage. So we took whatever they gave us.” Really? Really?!

Let’s do some simple math. If you’re purchasing a $500,000 house and have 20% down, your mortgage amount is $400,000. At 3% interest (which will inevitably increase over the 25 year period), you will have given the bank approximately $168,000 in interest. If interest rates climb to even just 5%, that amount increases to almost $300,000. So you have every right to make sure that you’re happy with your contract. Also, don’t be lazy. That’s a lot of money to be lazy about.

I had a lot of trouble finding any clear details on how to avoid major screw-tactics in a mortgage agreement. Until last night.

The Globe and Mail posted a great article in October with the ultimate mortgage checklist. I suggest using this list and going through the document to see if you agree or have further questions for your mortgage lender. I don’t know if it covers everything, but it does claim to be the ultimate checklist.

Paying your Mortgage

There are several ways to pay your mortgage. You can pay it monthly, bi-weekly, accelerated bi-weekly, and so on. There are several great calculators online that let you play around with these options, so I won’t get into too much detail here. But the basic rule is, the more you pay and the more often you pay, the less you pay in interest. So if you can’t afford to pay more each payment (most banks let you increase your payments and/or pay a lump sum payment every year – these amounts differ by bank), then at least increase your frequency.

We chose accelerated bi-weekly. This essentially means that we’re paying the same amount (the bi-weekly amount is just half of the monthly amount), but because it’s every 2 weeks, you get an extra couple of payments in. This is why:

Monthly Payments:
12 months = 12 payments

Bi-Weekly Payments:
52 weeks = 26 payments

Since 12 x 2 is 24, the 26-payment option means that you’re paying an extra 2 payments per year. Maybe it doesn’t seem like much, but it adds up over the life of the mortgage. Plus, this entire amount goes to the principle (not the principle + interest), so you’re paying down more of your actual debt faster. It also means that you’ll pay off your mortgage in 22 years and change, versus 25 years.

Home Inspection

This morning we headed over to the house for the home inspection. Our home inspector, Scott, took us through the entire house and patiently explained every part of the inspection. The amount of information was overwhelming, but will be included in his home inspection report, so we didn’t have to worry too much about remembering everything.

Here’s Alex checking out some moisture issues at the window:

There were no major surprises. He pointed out the major issues (knob and tube, a questionable porch and garage, some DIY plumbing that we might want to replace, etc.). The best part was that he clearly identified what we would want to do first and gave us two very useful tips:

• Major renovation projects always start with a simple: “I’m just gonna…”
• It’s always best to fix the cause, not the symptom.

Preparing for the Appraisal

After the home inspection we had to strategize about what would happen today (re appraisal). Three things could have happened:

• The appraisal could come back at the purchase price (yay!)
• The appraisal could come back lower than the purchase price (ah, crap)
• The appraisal could not come back at all (also ah, crap)

Based on the above, we would either waive our conditions and the house would be ours, present a mutual release which would allow us to walk away from the offer, or present an amendment to the offer that would buy us some time until Monday. We signed each document so that we could send whichever one we needed…

We then parted ways with Arthur and headed back to work. It was a long afternoon.

The Appraisal

At 5pm we still had no news. None. Well, we had news that they were working on it and would let us know by 6. So Alex and I headed home from work in a slight panic.

At 6pm our mortgage lender texted me to say she was on the phone with the appraiser. So we waited some more.

Several minutes passed. Several. At around 6:40 we convinced ourselves that this wouldn’t be good news. At 6:45, we finally got a call. We had verbal confirmation from the appraiser that the house appraised. Yay – sort of. We still didn’t have written confirmation from either the appraiser or the bank. We hung up the phone around 7pm and had to decide what to do.

The other fun add-on to this drama was that Arthur (our realtor) was about to board a plane to Vancouver. While we were waiting for the news, he called the selling agent to suggest an amendment to the offer that would buy us some time until Monday. The seller wanted nothing to do with it. We were either buying this house tonight or walking away.

Our last conversation with him was just after we got news of the appraisal and he suggested that we go for it. The worst case scenario at this point is that the bank doesn’t agree with the appraisal or that the appraiser was lying – both extremely unlikely events.

And it happens…

So at around 8pm, Alex and I decided to send our waived conditions document to our stand-in realtor. This would waive our conditions, thus confirming our offer.

The house is ours!!!

Now we’re going out. To drink. A lot.

Pre-approvals

I highly recommend getting pre-approved for a mortgage before you start looking for a house. It was one of the first things we did after meeting with our realtor for the first time and didn’t take long. If you are self-employed or have a lower credit score, it’s best to start the process as soon as possible in case you have any trouble. Not only was it comforting to know that we could get a mortgage, but it helped confirm our budget.

If you’re putting less than 20% down, like we are, there is another financing worry: having your house appraised.

CMHC 

In Canada, CMHC (the Canadian Mortgage and House Corporation) must insure any mortgage that is more than 80% of the purchase price (i.e.: where the downpayment is less than 20%). We decided to put 15% down, so we fall into this category.

Once you purchase a house, CMHC enters the purchase information into their computer system and it spits out a yes or no (this ‘system’ is mysterious to me so I only sort of know how it works.). Apparently a no is very rare and can spit it out for a bunch of different reasons, including that the house isn’t worth what the buyer has offered, or there isn’t enough information to determine its value.

When it spits out a no (like it did for us), CMHC then sends an appraiser to see the house. The appraisal visit can take several days to schedule, so if your offer expires in 48 hours (like ours does), it can be very stressful. Genworth is another company that insures mortgages, so sometimes the bank can get them to do the appraisal if CMHC can’t.

The appraisal itself doesn’t take long – maybe 20 to 30 minutes. We were at our home inspection when the appraisers (yes, more than one) showed up, so we got to see what’s actually done. They walk around with a clip-board, take some photos, and act mysteriously. We tried to be as nice as possible to them and mention that our offer expired in 10 hours…

The appraiser eventually writes a report that is sent to the bank. The bank then confirms that the amount offered is, in fact, worthy of a mortgage. Then you’re good to go. If it’s not, then things get complicated.

Now for some math.

Appraisals matter, but it has to do with what your loan-to-value ratio is, and therefore what CMHC requires as insurance. Here’s an easy example: If you were pre-approved for a $1 million and want to buy a million-dollar home that’s actually only worth $200,000, it’s an obvious problem.

I tend to think about my mortgage in terms of what I couldn’t cover with my down payment is. However, to understand how appraisals affect your lending ability, you really need to think of it in a different way: what your loan-to-value ratio is.

Here’s a simple example:

Purchase Price: $500,000
Down Payment: $50,000 (10%)
Mortgage Amount: $450,000 (90%)
Mortgage Insurance Premium: $9,000 (calculated here)

The loan-to-value ratio here is high: 90%. This means that you are borrowing 90% of the value of the home (or putting 10% down). Because this is higher than 80%, CMHC requires mortgage insurance. In this case, $9,000. The $9,000 can be added to your mortgage or you can just pay it upfront.

If your house appraises at $480,000, then things get complicated.

Purchase Price: $500,000
Appraised Value: $480,000
Down Payment: $50,000 (6.25%)
Mortgage Amount: $450,000 (93.75%)
Mortgage Insurance Premium: $12,375

Note that the purchase price, down payment and mortgage amount didn’t change. But the loan-to-value ratio has. Now the $450,000 mortgage represents a higher percent of the value of the home (450/480 = 94%, whereas 450/500=90%).

Because your mortgage amount hasn’t change, you’re not going to pay any additional interest over the life of the mortgage. However, you are going to pay more mortgage insurance ($12,375 instead of $9,000) because your risk is higher. And, if you add this amount to your mortgage (which is the norm), you will pay more interest because the total mortgage just went up by this amount.

Where it gets really sticky is if you only have 5% down. In this case, the loan-to-value ratio is 95% – the absolutely highest that it can go. As in the example above, if the appraisal comes back lower than the purchase price, the loan-to-value ratio will increase above 95%. Since this isn’t allowed, the only way to purchase the home will be to make up the difference in cold, hard cash.

Confusing? A bit. But this isn’t a huge problem unless you’re hovering around the 5%-down line. Then you need to back out of the offer and walk away (because the bank will make you). Plus, who wants to overpay for a house anyways?

This morning we got a call from the bank. CMHC wants to do an appraisal.

The problem is that our offer expires tomorrow at 9pm and getting an appraiser to see the house before then is going to be a challenge. The bank is currently doing everything they can to get someone to show up… but it’s not looking good…

Our worry is two-fold: that the appraisal will come back at less than we’ve offered or that the appraisal won’t come back at all because there isn’t enough time to get it done.

It only took about an hour until our realtor called us back and said that she accepted! I think my exact words to him were: “No shit?!” I was eloquent, as always.

Apparently she was reluctant and unhappy about the conditions (home inspection and financing), but now the ball is in our court. Since our offer expires at 9pm on Friday night, we have just over 48 hours to make all of this happen. Then it’s ours!!!

This is really happening. Holy crap.

The weekend has now passed and there are still no other offers. The seller is now willing to come down slightly, but it’s still much higher than what we’ll pay now. The funny thing is, on bid night we may have offered her the amount that she’s now asking for. But now we’re tired, angry and a bit paranoid that something’s wrong with the house. I mean, why hasn’t anyone else bid?!

We decided today that if we’re going to pay as much as she’s asking, it’s going to be because we have to (ie: other bids start coming in). We’re certainly not going to just give her what she wants. Not after what we’ve gone through.

So now we wait again… (im)patiently…

And she’s having another open house. Except she didn’t post it on the public site, much like she didn’t the first time…

Alex’s dad is visiting this weekend, so we’re going to try to stay busy showing him around Toronto and ignore the house for a while. We’ll follow up on Monday after a weekend of visits and see what position we’re in. I go between extremely hopeful and extremely sad every 2 to 3 minutes. It’s going to be a long weekend…

Last night was bid night. We left work early and met our realtor to sign the offer. About five minutes before bid night officially began, we found out that there were no other bidders. Amazing.

One of the last things you do before signing is writing in the price. Since we were the only bidders, we offered asking. As our agent left, Alex and I realized that we may have just bought a house… Eek.

It wasn’t long before our agent was done. He offered asking and apparently the seller wouldn’t accept anything less than $100K over asking. WTF?! Apparently she’s been reading the news about the crazy bidding wars and huge payouts. The only problem is that you need a bidding war to get a huge payout. She didn’t have one. She only had us.

So we left. We’re mad. Really mad. We’re mad that we didn’t get the house, we’re mad that she’s so greedy and we’re mad that we wasted so much time.

So what is happening here? I thought I’d break down some of the interesting things I’ve learned along the way.

Pricing

Generally, it’s not that houses are sold for more than they’re worth. Instead, agents price houses well under what they’re worth to stimulate a bidding war. There’s essentially no downside to under-pricing, but over-pricing will discourage people from looking seriously because they assume it’s out of their budget.

I signed up for Toronto Real Estate Sold, which sent me daily reports on properties sold in Toronto (by price or location). It was a great resource and I used it to track houses (via spreadsheet) that we were interested in to get a sense of what we should offer. It looks something like this:

From what I observed, most houses sell in 7 days (see DOM or “days on market” in the image above). Anything that is on the market for more than 7 days usually sells under asking.

Timing

Things move very fast in Toronto. In general, but also in real estate. This probably surprised me the most. You see a house and decide within days whether you want to buy it. Crazy, right?!

This is basically the timeline for when things happen:

Tuesday (Day 1): House posted on MLS

MLS (or realtor.ca) is the best place to look for houses (for more, see my other post).

Once you see a house that looks more-or-less like something you might be able to live in, check it out on Streetview, look at the photos, and call your agent (who books a time to see the house).

Saturday/Sunday (Days 5/6): Open House

Open houses are usually on the weekend (but can also be Thursday or Friday). Our realtor never brought us to open houses, but instead brought us before the open house to take a look. This is also how I learned how those little real estate agent lock boxes work.

Your realtor contacts the selling agent to get the combination and confirm a time when you will visit. Then you show up, punch in the code, and get the keys to the house.

It’s nice to see houses outside of Open House hours because it allows you and your agent to speak freely about what you like/dislike. It also allows you to snoop a bit – like look under rugs for what the floor really looks like, look in closets, etc.

Monday-Tuesday (Days 7-8): Run-around Days

I call these the run-around days because that’s what you do: run around.

If the selling agent hasn’t already done a home inspection, now’s your chance. Home inspections take 2-3 hours, so most home inspectors can only do 2 per day (given that they need/want natural light). This means that many are already booked, so you might want to keep a few names on hand (or ask your agent) in case you don’t get your first choice.

One of the things I didn’t know before starting this process was that you also need to show up with a deposit cheque. And in Toronto, the deposit cheque better be pretty hefty. Apparently it’s how you show that you’re really serious. And you can’t be $10,000 serious. You need to be at least $40,000 serious. This deposit ensures that you won’t back out of your offer because if you do, you lose the cheque. I don’t know much about this because I didn’t have to test it, but I’m sure there are other ways of getting your money back if this happens. It’s just likely painful enough that you really don’t want to make an offer unless you really want to purchase the house.

Your agent should also send you some comparables – other houses that have sold in the same area that are comparable to yours. This will give you an idea of what you should expect to pay. You will then decide what your bid range is. For example, if the house is listed at $700,000, your range might be $700-760K, depending on how badly you want the house. We had a rational range and then an emotional range – the extra bit of crazy we were willing to go based on how much we loved the house.

You should also call the bank at this point to confirm that everything is good to go. I didn’t have to do much here – actually, our agent called the bank for us. But it’s good to confirm that everything’s in place before the big night…

Tuesday or Wednesday (Day 8 or 9): Bid Night

Now the scariest part. Between Sunday and Tuesday, you’ve likely done everything humanly possible to get your offer together. You’re tired. But excited. But also terrified.

There is usually a bid registration deadline (about an hour before bids are viewed). Most bid nights start around 7, so your agent will likely register around 5 or 6. Just before 7, your realtor will then call the selling agent and confirm the number of bids. I’m not sure what the norm is, but my sense is that they’re pretty honest about it. This lets you know where in your range you need to be.

At this time, if you haven’t done so already, you will sign a contract with your agent to solidify your working relationship. Basically, he gets commission on the house you buy. We didn’t sign ours until bid night, but sometimes this happens when you first start working with an agent. You will also fill out the offer paperwork that confirms the price and conditions on the offer.

If there are no other offers, you’ll likely start at asking or the bottom of your bid range. If there are 10 offers (or more), you’ll likely be at the top end of your range and also throw all of your conditions out the window. Whether it’s right or not, if you want to win a bidding war in Toronto, you have to have the best offer. This usually (but not always) includes the top price, a hefty deposit and no conditions on the offer.

Then you wait.

This didn’t happen to us (because we were the only bid), but sometimes the selling agent comes back to the highest bidders and basically asks for more. This is where speculation comes into play and you now have to figure out if you want to bid more – not knowing whether you’re the lowest or highest. It’s awful and I’m glad we didn’t go through this. But it happens. A lot.

Within a few hours, you’ve either bought a house or lost it in battle.