These are items such as legal fees, property taxes, land transfer taxes, insurance, etc. that are not part of the property purchase, but must be paid before the purchase transaction can be complete.
And in some cases, the amount can be fairly substantial.
I had a call the other day from a couple that were 4 days away from closing, had all their financing arranged, but did not have $12,000 to pay the closing costs.
In many cases, when the closing costs are overlooked, most people are able to scramble around to come up with the money and complete the transaction. But even in these situations, they may end up using all their available short term credit which can lead to ongoing cash flow and cash management problems in the future as well as increased cost as now more debt has to be serviced.
In other cases, the inability to close the deal can be quite costly as well in the form of you losing your deposit which can kill the whole plan of home ownership altogether.
One of the reasons that the closing cost problem happens fairly regularly is that none of the professionals involved in the transaction take the time to point it out, even though they all know that there will be closing costs that need to be paid. This can include the real estate agent, lender, mortgage broker, and lawyer.
The other problem with not estimating for these costs ahead of time is that too much of your available money may get committed to your down payment and potentially your deposit, which can influence your mortgage approval. If closing costs were properly allowed for from the outset, then funds could be put aside to cover them off and the remaining cash or equity pledged towards the purchase.
This is why its advisable, especially for first time home buyers, to work with an experienced mortgage broker that is going to walk you through the whole home mortgage financing process and outline all the steps involved, including budgeting and funding closing costs.
Then when your mortgage application gets approved, the path to closing the deal will not be derailed by something that should have been considered earlier on in the process.
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel