Home builders do not pay closing costs, but they may offer incentives on closing costs. The majority of closing costs are related to the mortgage process, and working with the builder’s lender may provide incentives on the closing costs. The buyer is responsible for paying closing costs on a new construction home.
Examples of Closing Costs
Whether you’re purchasing a new home or existing home – there will always be closing costs. So, what are closing costs? These are costs associated with closing the sale on a property purchase. They will cover lender fees, notary fees, title search fees and related expenses. When you are closing on a home and signing the deed with your lawyer or notary, you may come across the following closing costs:
- Lender Originator Fees
- Settlement or Escrow Fees
- Title Search Fees
- Mortgage Default Insurance
- Land Transfer Taxes
- Pro-rated Property Taxes
- Government Fees
- Notary Fees
- Broker Commission Fees
While these are common closing costs, not all of these fees will apply when purchase a new construction home. On average, a new construction home will have closing costs associated to the mortgage, builder and lawyer. A new construction closing cost breakdown will be the following:
- Development Fees (usually capped)
- Land Transfer Tax
- Applicable HST
- Lawyer Fees
- Deposit Registration Fee (charged per deposit) +HST
- Tarion Enrolment Fee for New Homes
- Meter Installation Fees
- Title Insurance
- Purchasers Common Interest Allocation (Ontario New Home Warranty Act)
In regards to the above mentioned fees, the development fees are usually capped at a maximum and will be outlined when you purchase the new build. The deposit registration fee is on average $100-$150 and is charged for each deposit you make. If you made 10 deposits for the new build, you would be charged $1000-$1500 at closing. Some builders may choose to incur these costs, while others charge you.
If the home is not being used as a primary residence and is being rented out, you will also have to pay HST on the home during the closing. While your home insurance is not part of the closing cost, you will need to make the payment to your insurance provider to obtain proof of insurance for the notary.
The Tarion enrollment fee is on average $1000-$2000 at this time for most buys, with the purchase common interest allocation at $600. To calculate your land transfer tax, you can use the this calculator. A lawyer will be able to make a final decision on the closing costs after they’ve received the Statement of Adjustments from your builder.
As mentioned earlier, home builder’s don’t pay closing costs in general, but they may offer incentives in partnership with their lender. You can learn more about this by reading about can a builder require a certain lender.
A lender will choose to be a builder’s preferred lender and in exchange – will provide discounts to the home buyer on fees related to signing the mortgage with them. Since a builder will send a large volume of deals to the lender, they are more than willing to eat up the costs for offering the mortgage.
How Much Are Closing Costs on a New Build?
The closing costs on a new build are estimated to be $10,000 to $20,000 on a new construction home. These fees can vary depending on the items identified on your purchase agreement. Your lawyer will be able to best estimate the closing costs on a new build.
The incentive may be outlined as a 2-3% reduction on the closing costs. We’ve seen builder’s offer the incentive based on the amount borrowed vs the purchase price of the home. Confused? Let’s have a look at an example where the incentive is a 2% reduction on closing costs:
Purchase Price of New Construction Home: $720,000
Mortgage Amount Borrowed: $576,000
Incentive Amount: $14,400 vs $11,520
As you can see, there is a considerable difference on the rebate amount – based on which price the builder is offering the incentive percentage on. It’s worthwhile speaking to the builder first, and have the incentive in writing. It is never a good idea to only have verbal confirmation – it will not hold up on court.
So, are closing costs lower on new construction? No, closing costs are not always lower on new construction because they include builder and warranty related fees, harmonized sales tax and development fees. Some new builds have higher closing costs due to these fees.
When Do You Pay Closing Costs on a New Construction Home?
You pay closing costs on a new construction home when you sign the deed with your notary or lawyer. The buyer will have to pay the closing costs up front at the signing, as it is not included in the mortgage amount. You cannot include closing costs in your mortgage.
On the day of your closing, you will need to bring with you a bank draft for the amount of your closing – your notary will inform you how much. The bank draft will be deposited by the notary to cover these costs – as some costs go to the lawyer, builder, city and insurance companies.
Your anticipated closing date will be apparent from the purchase agreement, but it can change depending on the timeline of the build. There are many delays that can occur when building a home – which could push your closing date. As the home buyer, you need to sit with your lawyer to read the purchase agreement prior to signing it off. Once the builder and buyer sign the contract – it is now legally binding.
If you have questions about your specific closing costs, you should speak to your notary.