You Absolutely Positively Need To Know What These Mean

By: Thomas Cook

You Absolutely Positively Need To Know What These Mean

YOU ABSOLUTELY, POSITIVELY NEED TO KNOW WHAT THESE MEAN


As you get into learning the best ways to buy a home in today’s busy market, you’ll need to familiarize yourself with the terms of the business so that you will be speaking the same “language” as the real estate and mortgage financing professionals in the field!

Real Estate: 
Most commonly includes the sale of real property such as houses, condominiums and commercial property but also includes the rental of real estate and the sale of businesses.

Real Estate Broker or Salesperson: 
An intermediary between the buyer and seller who is licensed by the Province of Ontario to carry out such activities.

Listing Agent:
This is the Realtor who is acting on behalf of the seller in the transaction.  His or her goal is to get the highest price and best terms for the seller.

Buyer Agent:
This is the Realtor who has signed a Buyer Representation Agreement (BRA) with the buyer and who is now representing the best interests of the buyer.  Their goal is to get the lowest price and best terms for the buyer.

Dual Agency:
There are two distinctions to dual agency.  The first is where one agent who starts off as the listing agent is also trying to represent the buyer in the transaction and collect both halves of the commission.

Our Team considers this to be a direct conflict of interest and, if we are representing the seller as their listing agent, we will not also try to represent the buyer at the same time.

The other occurrence of ‘dual agency’ happens when the buyer agent who brings an offer on a condo or house where I’m the listing agent is also an agent at RE/MAX Hallmark where I work.  
 
Since that agent will have no knowledge of any of my discussions with the seller (Hallmark has over 1100 agents now) there is no conflict… I’m going to work hard to get the seller the best price and the buyer agent is going to do the same for their buyer client.

Similarly, if I’m the buyer agent presenting an offer to a Hallmark listing agent, I know he or she is working on behalf of the seller and they know I’m working on the buyer’s behalf… no conflict!!

Real Property: 
The combination of the tangible and intangible attributes of land and improvements. Value-wise, it is the sum of the value of the real estate, considered as land and structure.

Fair Market Value: 
The highest price, in terms of money, that the property will bring to a willing seller if exposed for sale on the open market while allowing a reasonable time to find a willing buyer, buying with the knowledge of all the uses, and with neither party acting under necessity, compulsion or peculiar and special circumstances.

Assessed Value:
A valuation placed upon property by the Province, as a basis for municipal taxation. This is NOT the same as market value and, so far in Ontario, although we have ‘Market Value Assessment’, the assessed value is NOT 100% accurate as to current market value.

Appraisal:  
The act or process of estimating value. This appraisal is done for mortgage-lending purposes and may not necessarily match the sale price of the property.

Salesperson (Sales Representative):
An employee of a broker authorized to trade in Real Estate ... your agent.

Agreement of Purchase and Sale (Offer to Purchase): 
A contract by which one party agrees to sell and another agrees to purchase. The contract may be firm (no conditions attached), or conditional (certain conditions must be fulfilled).

Deposit: 
Payment of money or other valuable consideration as pledge for fulfilment of contract; given as a “piece of paper” when the offer is signed and converted to a bank draft or other form of payment once the offer has been accepted.

In a busy market to make their offer more attractive to the seller, often the buyer provides a bank draft as their deposit at the same time as their offer is presented.

The deposit in Toronto is typically 5 - 7% of the purchase price.

Down Payment:
The down payment is the total amount of money that the buyer is paying for the property and is then financing the balance of the purchase price as a mortgage.  The down payment includes the buyer’s deposit with their offer.

For example, a purchaser might have 20% of the purchase price as their down payment of which 5% is their deposit with the offer.  Then on closing, they pay the balance of their down payment (another 15%) plus their closing costs.

Irrevocable: 
Incapable of being recalled or revoked; unchangeable, unalterable.  

Irrevocable Date: 
The date that the offer, from either buyer or seller, is good until. It is typically “same day the offer is signed,” or up to 48 hours after the signing (or counter-signing) date.

When the buyer signs their offer, they will make it ‘irrevocable’ to the seller for a specific period of time… say 11:00 pm tonight or 3:00 pm tomorrow.  Similarly, when a seller counter-signs that offer, they could change the irrevocable date and time.

Condition: 
A condition in a contract calling for the happening of some event, or the performance of some act, before the agreement becomes firm and binding for all parties.

Conditional Offer: 
An Agreement of Purchase and Sale may be subject to specific conditions. These conditions could be arranging a mortgage or a home inspection, or the inspection of a condominium Status Certificate. There is always a time limit stipulated within which the specified conditions must be met.

Firm Offer:
Very common in today’s busy Toronto market, in order to make their offer more attractive to the seller, they will remove all conditions from their offer so that, once the seller accepts it, the deal is done and the sale is ‘firm and binding’.

Holding Off Offers:
Starting a few years ago, some listing agents have taken to advising their sellers to underlist their home by a significant amount (often by 10-20%) and then to start showings but not accept offers for typically 7 days.
 
This is done in the hope of creating an auction effect where several buyers will bid against each other and end up paying the seller above market value.
 
In today’s busy Toronto market it is almost inevitable that we will come across this situation in our home search.

Bully Offer:
So the seller has decided to hold off offers for a week BUT a buyer agent calls and says they have an offer that is irrevocable only to tonight at 11:00 pm.  If the seller refuses to see it, the buyers are going elsewhere.  This is a bully offer.
 
Again, there are pros and cons to putting in a bully offer which we can discuss at either our Starbucks Strategy Session or our Buyer Consultation.

Sealed and Delivered: 
A term indicating that a seller has received adequate consideration as evidenced by his voluntary delivery. The word “sealed” adds more strength, since under old conveyancing law an official seal was used as a substitute for consideration.

Home Inspection: 
The examination of the house or condominium by an expert selected by the buyer.  It’s not common to have an inspection done for a high-rise condo suite but, if the buyer has some concerns, it can be asked for and arranged.

Closing Date: 
The date specified in the Agreement of Purchase and Sale when the buyer is to deliver the balance of money due and the seller is to deliver a duly executed deed and vacant possession of the property.

Permanent Fixtures: 
Permanent improvements to property that may not be removed upon the sale of the property (furnace, central air conditioning, pool, windows, etc).

Chattels: 
Personal property that is tangible and moveable, such as appliances, blinds, light fixtures, etc.

Encumbrances: 
Outstanding claim or lien recorded against property, or any legal right to the use of the property, by another person who is not the owner.  Recently we’ve seen that builders have installed rental furnaces into condo suites. 

These must be declared by the seller and unfortunately they must be accepted by the buyer (usually the pay-out to the rental company is so high that it’s better to just accept the rental situation).

Adjustments: 
Adjustments may be property taxes (either unpaid or paid in advance), electricity, gas or other fuel, condo fees or mortgage interest already paid out for future service. These must be pro-rated and be credited on closing to the appropriate side of the transaction. This can involve an expenditure of several hundred dollars payable on the closing date when the sale is completed.

Statement of Adjustments: 
A statement of the financial breakdown of the transaction prepared by the solicitor for the seller setting out, in balance sheet form, the credits to the seller (e.g. purchase price, prepaid taxes, prepaid insurance, etc.) and the credits to the buyer (e.g. deposits, arrears in taxes prior to the date of closing) and the balance due on closing.

Closing Costs:
These will include such items as Province of Ontario Land Transfer Tax, City of Toronto Land Transfer Tax, legal fees and disbursements, HST on high-ratio mortgage insurance premium, appraisal cost, Status Certificate fee, etc.

Our Team will prepare a Closing Cost Estimate spreadsheet at the Starbucks Strategy Session or at the Buyer Consultation to give you an excellent idea of how much money you need to set aside for these expenses.

Survey: 
The accurate mathematical measurement of land and buildings thereon, made with the aid of instruments by a licensed land surveyor. They show the legal boundaries of the property, the location of any buildings on the lot plus measurements.  Surveys are not done for condominium suites.

Title: 
The means of evidence by which the owner of land has lawful ownership thereof.

Buydown:  
Although typically fairly rare these days with our low interest rates, the seller effectively lowers the rate of interest of a mortgage for the buyer by prepaying a portion of the interest on his own existing mortgage, or on a mortgage arranged by the buyer.

Canada Mortgage and Housing Corporation (CMHC):
The federal CMHC is the Canadian crown corporation that administers the National Housing Act. CMHC services include providing housing information and assistance to consumers and insuring home purchase loans for lenders.

See below the definitions of conventional and high-ratio mortgages.

Deed: 
The final document prepared by a lawyer or notary to be signed by the seller and buyer transferring ownership. This document is then registered against the property as evidence of ownership.

Deeds are now prepared and registered electronically in Toronto by the buyer’s lawyer in co-operation with the seller’s lawyer.

Mortgage Discharge: 
The removal of all mortgages and other encumbrances typically at the time of sale by paying off all outstanding liens registered against the title of the property.

Easement and Right-Of-Way:
The right acquired for access to, or over another person’s land for a specific purpose, such as for a driveway or public utilities.

A semi-detached house might have a ‘mutual drive’ meaning that the lot line goes close to the centre of the space between the two houses but each home owner has a right-of-way over the other person’s half of the driveway in order to access the back yard.

Encroachment: 
The unauthorized extension of boundaries of land, such as when a homeowner puts up a fence or perhaps a utility shed over the lot line and “takes over” some of a neighbour’s property.

Holdback: 
An amount of money withheld by the lender during the progress of construction of a new house or major renovation to ensure that construction is satisfactory at every stage. The amount of the holdback is generally equivalent to the estimated cost to complete construction.

Home Insurance: 
Before the sale transaction can be closed, the buyer must have fire and liability insurance arranged and in effect. A certificate from the insurance company (called a ‘binder’) will be required by your lawyer at the closing as proof that you have that coverage.

This applies to condo purchases as well although it’s much cheaper.  Condo buildings have their own insurance so the owner’s policy must only cover the contents, liability plus enough coverage to pay for the replacement of any upgrades that have been done to the unit over and above what the original builder provided.

Owner’s Net Equity: 
The difference between the price for which a property could be sold and the total debts (mortgages or liens) registered against it.

Option Agreement:
A document stipulating that, in exchange for a deposit, a specified individual is to be given first chance or option to buy a property within a specified period of time. If the option-holder does not buy within the specified time, he loses his deposit.

Power of Sale: 
The right of a bank or trust company to force the sale of the property without judicial proceedings, should the owner default on their mortgage payments.

Prospect: 
A potential buyer or customer.

Commission: 
Percentage of the home’s sale price paid at closing to the listing agent and to cooperating agents.  On closing, the commission is paid 100% to the listing brokerage and then disbursed from there according to the terms of the MLS listing agreement signed by the seller.

Multiple Listing Service (MLS): 
The system in which participating brokers agree to share commission on the sale of houses listed by any one of them.  Our homes are listed on the Toronto Real Estate Board and then are made available to all 45,000+ licensed Realtors in the Board.  

This wide exposure is a major benefit to the seller to give their home maximum exposure to the market.

Condominium: 
The ownership of a separate amount of space in a multiple-family dwelling or other multiple-occupancy building with proportioned tenancy in common ownership of common elements used jointly with other owners.

A condo owner owns 100% of the interior of their suite and proportionally shares the ownership of all the common elements (hallways, elevators, lobby, building facilities etc).

Co-operative: 
Same as above but the owner does NOT own his/her specific unit. He/she becomes a shareholder of the corporation that owns all the real property and occupies the unit by way of an exclusive tenancy agreement.

Because this type of ownership is a share agreement, it is often more difficult to arrange mortgage financing and typically the buyer is required to put down 20-30% of the purchase price as their down payment.

Mortgage Terms You Should Know

Mortgagee: 
The lender (bank or trust company generally).

Mortgagor:  
That’s you, the borrower.

Blended Payments: 
Equal payments monthly or bi-weekly consisting of both a principal and an interest component, paid each month or every two weeks during the term of the mortgage. 

Because the principal is being paid down incrementally with each payment, the principal portion of that fixed payment increases each month, while the interest portion decreases, but the total monthly payment does not change.

Closed Mortgage: 
A mortgage that cannot be prepaid, renegotiated or refinanced.

Most bank and institutional mortgages we see today are closed with partial pre-payment privileges built into them.  If after a few years you won the lottery and wanted to pay your mortgage off in full, the bank would charge you a penalty.

Open Mortgage: 
A mortgage that can be prepaid at any time, without penalty.  These are usually private mortgages which have an ‘open’ privilege.

Mortgage Term: 
In a mortgage, “term” is the actual length of time for which the money is loaned, at that particular rate of interest. At the end of the term, you can either repay the balance of the principal then owing in full or, most commonly, renegotiate the mortgage at the then-current interest rates. 

A typical term is 5 years, with anything from 6 months to 5 years also being available.

Amortization: 
The number of fixed payments or years it takes to repay the entire amount of the mortgage loan. In Canada, this it typically 25 years.

Principal Balance:  
The amount you still owe the lender at any specific time.

Interest Rate: 
The return the lender receives for loaning you the money for the mortgage. 

Interest rates were as high as 18-21% back in the early 1980’s and were in the 4-5% range in the early 2000’s.  Rates over the past few years have been at record low levels in the mid- to high-2%’s

Amortization Schedule: 
The amortization schedule separates out the monthly installment portions for both principal and interest and how much of the payment is allocated to each. It also shows the unpaid principal balance.  

The amortization is the number of years that it will take to pay off the mortgage, were the interest rate to remain constant. Mortgage term refers to the length of time a particular interest rate will be in effect.

Conventional mortgage: 
A mortgage loan that does not exceed 80% of the appraised value or purchase price of the property, whichever is the lesser. Mortgages that exceed this must be insured and are called high-ratio mortgages.

High-Ratio Mortgage: 
This is a mortgage that is higher than 80% of the purchase price (or appraised value) of the property. A high-ratio mortgage typically can be as high as 95% of the value (and in some cases can go to 100% of value).  High-ratio mortgages MUST be insured by either CMHC or one of the other two high-ratio mortgage insurers we have available in Ontario.

Mortgage Insurance Premium: 
A premium that is added to the mortgage and paid by the borrower over the life of the mortgage. The mortgage insurance insures and protects the mortgage lender against loss in case of default on the part of the borrower.

In our Starbucks Strategy Session or Buyer Consultation we will review what these costs could be for your situation.

Full Mortgage Pre-Approval: 
Many people mistakenly believe that by just filling in an online form or having a conversation with a banker where they verbally provide data about their income and their debts is enough to go out and buy a condo or house.  

It ABSOLUTELY is not enough and it’s very dangerous to buy any home based on just this.

To be 100% sure of your financial capability, and get a FULL mortgage pre-approval, a prospective buyer must provide their banker or mortgage broker with proof of income, proof of down payment and have a credit bureau done.  Here’s what you’ll need to provide... 
 
1- A completed mortgage application form
 
2- For proof of income, you’ll provide a copy of your employment letter, a current pay stub and your last income tax return with T4s and Notice Of Assessment from Revenue Canada
 
If you are self-employed, you’ll need to provide a copy of three years of Revenue Canada tax assessment statements.
 
3- For proof of down payment, you’ll provide a copy of any GICs, term deposits, or RRSPs plus a copy of your bank statement showing current cash in the bank.  If you’re getting funds from a family member, you’ll need to provide a copy of a gift letter signed by that person.
 
Your lender or mortgage broker will then do a credit check and they will issue an Unconditional Pre-Approval Certificate, which is the lender’s guaranteed mortgage commitment to the buyer.  It is conditional only upon an appraisal or CMHC/GE Capital approval.

At our Starbucks Strategy Session or Buyer Consultation, we will elaborate on this further and help you make the next steps forward.

Gross Debt Service (GDS) Ratio: 
This percentage figure is calculated by totalling the annual payments for mortgage principal, interest, realty taxes and 50% of the heating cost, divided by the gross annual income of the borrower. Most lenders prefer that the GDS be no more than 39%.

Total Debt Service (TDS) Ratio:  
This percentage figure is calculated by totalling the annual payments for mortgage principal, interest, realty taxes and 50% of heating costs, PLUS annual payments for bank loans, lines of credit, credit cards & other debts, divided by the borrower’s gross annual income.  Lenders prefer the TDS be no more than 44%.

P and I: 
Principal and interest due on a mortgage.

P I T: 
Principal, interest and realty taxes due on a mortgage.

Prepayment Options: 
The right to prepay specified amounts of the principal balance (typically 10 - 20% of original mortgage principal amount depending on the lender). Penalty interest rarely may be incurred on those prepayment options. You can often increase your monthly or bi-weekly payments (by from 10-100% depending on the lender) and also double-up your payment anytime.

Assumption Agreement: 
In this rare case, you might agree to assume an existing mortgage on the property you’re buying.  The assumption agreement is a legal document signed by the home buyer that requires the buyer to assume responsibility for the obligations of a mortgage made by a former owner.

Mortgage Life Insurance: 
Not to be confused with CMHC insurance, life insurance is a form of reducing term insurance recommended for the borrower. In the event of the death of the owner, or one of the owners, the insurance pays off the balance owing on the mortgage. The intent is to protect survivors from losing their homes.

Second Mortgage: 
Perhaps, due to credit issues, you can only qualify for a mortgage of up to 75% of the purchase price BUT you only have a 15% down payment.  You might then arrange for a second mortgage for the missing 10% of the purchase price.

A second mortgage is usually at a higher interest rate and represents the difference between the price of the house and first mortgage plus the down payment. This may be obtained from private lenders, finance companies or through lawyers and notaries.

Variable Rate Mortgage (Floating Rate):  
A mortgage in which payments can be fixed from one to five years, but the interest rate could change from month to month depending on market conditions. Variable mortgage rates are determined by adding or subtracting a certain percentage from the official Bank of Canada Prime Rate.

If interest rates go down, the monthly principal is reduced; if rates go up, the monthly payments might not cover the interest owing and payments may be increased for the next term. 

Seller Take Back Mortgage (or Seller Financing): 
Although rare in today’s low interest, busy market, the seller of a property might provide some or all of the mortgage financing in order to get their property sold.

Default: 
Non-payment of the installments due under the terms of the mortgage(s).

Discharge: 
The removal of all mortgages and financial encumbrances on a property.

Discharge Penalty: 
A sum of money paid to a lender for the privilege of prepaying a mortgage in part or in full.

Mortgage Broker Underwriting Fee: 
A sum of money collected by some lenders to offset expenses incurred in the lending transaction.

For ‘prime’ mortgage borrowers, the lender pays the broker so there is no out-of-pocket cost to the borrower.  

However, if the borrower has credit or other issues and the only lenders who will supply the mortgage funds are ‘second’ or ‘third’ tier lenders, then there will most likely be a fee attached to the obtaining of that mortgage commitment.

Thomas Cook
Thomas@LivingInToronto.com
647-962-1650

 


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Here are 5 proven ways to move safely and smartly towards your real estate buying goal...

  1. Download a free copy of my Ultimate Home Buyer’s Guide book
Find out everything you need to know about buying a Toronto house or condominium. Instead of randomly searching all over the internet, jump start your home buying experience and get a wealth of expertise and experience in one place.

Download your Guide here
 
  1. Get a custom listings search set up for you and receive targeted listings daily
If this list is not specific enough for you, we can put together a custom list of homes.  Maybe you want only 2-bedroom condos in specific neighbourhoods, or only semi-detached houses, or even a certain school zone. 
 
We can set up your HOMEWatch search for any area you choose (not just downtown Toronto), and you'll get immediate access to homes within minutes of them being listed.  Just leave some search criteria here
 
  1. Set up a step-by-step plan with the best ways to get to your home buying goal
At the beginning of the home buying journey, often the picture of what the end result might look like is a little ‘fuzzy’.
 
Our first-time and move-up buyers have told us that being able to meet with us on a casual basis as early in the process as possible, even if their purchase date was 6-12 months away, really worked the best for them.

To arrange your no-obligation Starbucks Strategy Session, click here.
 
  1. Join us for a Market Experience Tour - pick your favourite neighbourhoods and price range
Start getting educated about what your condo likes and dislikes are. 
 
The Market Experience Tour is a great way for you to figure out which neighbourhoods and condo buildings are right for you, and you’ll also get a good sense of what’s available in your price range.
 
Pick the date and time you like to go on your Tour.
 
  1. Don’t start your home buying experience on the wrong foot - Meet for a Buyer Consultation first!!
Home buyers have come to us after trying to work with another agent saying “I don’t think he even knows exactly what I’m looking for and I’ve got questions he doesn’t have the answers to”.
 
Don’t make the same mistake.  Let’s set a time to meet and go over how the complete home buying process works, find out what your likes and dislikes are and what pitfalls you’ll want to avoid, before you seriously start looking for a house or condominium.
 
This is the best 90 minutes of time you’ll ever spend - set up your private Buyer Consultation.