There are times when taking out a mortgage feels like the most thorough physical examination that you have ever had. However, unlike a trip to the doctor, the underwriting process can take weeks, as the bank keeps coming back to ask for just one more document. If all you need to buy a car is verification of your income, why is this so much more arduous?
There are several reasons. One is the Anti-Terrorism Act, which requires banks to verify that all funding that you use to purchase a home (including your down payment) comes from legal sources. In addition to terrorist activity, there are also organized crime groups in Canada that like to launder money.
Mortgage fraud is also a very real risk. Sometimes there are multi-million dollar fraud enterprises going on, and they would escape official notice if lenders did not chase down every single problem in a loan application. While the vast majority of people who apply for mortgages are not involved in a criminal enterprise, there are such nefarious things going on, and in terms of police investigations, court time and other public costs, there is a very real interest in keeping the rules in place.
There’s also the fact that lenders have to report to mortgage default insurers and their own shareholders – not to mention OSFI, which regulates them. If you take out a mortgage that you can’t pay and end up going into default because you can’t pay it, the bank will have to show that they undertook full due diligence before approving the loan.
Think about it this way. For a car, you might borrow $20,000 or even $50,000 to complete the purchase. For a home purchase, you might be borrowing 10 or even 20 times that much. If you were the lender, how much due diligence would you perform?
So let’s look at your down payment. The bank will want to see documentation that the money is sitting in an account with your name on it, and that the money has been there for at least 90 days (or at least they will want to see a 90-day transaction history). If you have any deposits into that account greater than $500 during that time, you’ll have to account for those.
Banks also want to see that you have some savings in addition to your down payment. You’ll have to pay at least 5 percent down, but banks also want to see that you have a plan in case something happens (job loss, illness or the like).
So what are the most commonly accepted down payment sources, and how do the banks verify them? Let’s take a look.
- Savings accounts. You’ll need a 90-day account history to verify these funds.
- TSFA. You’ll need a 90-day account history here as well.
- RSP – In addition to that 90-day history, you’ll also need that you redeemed the funds using RSP forms and that the funds went directly into your account.
- Loan – Some lenders will allow you to use borrowed money for your town payment. However, they will have to see the term loans to see if you can afford to pay both that note and the mortgage.
- Gift – This can come from an immediate family member, and you’ll need a signed gift letter indicating that the provider is not expecting repayment. You’ll also need an account statement from the person saying they gave you the gift in some cases, as well as proof that you deposited that gift into your account.
- Line of Credit / Credit Card – This is similar to #4 above. Can you repay both?
- Gifted Equity – If you’re buying a relative’s home, they are allowed to gift you the equity that they have in the home, and that can be your down payment.
- Asset Sale – You can sell something to fund your down payment, but you’ll also need to provide the bill of sale, a copy of that cheque, and proof that you deposited it into your account.
- Inheritance – You’ll need to provide the documents from the lawyer, along with proof of deposit into your account.
What about money you had in a box in your attic? Put it in a bank account for 90 days before applying to use it as a down payment. Otherwise, you’ll get a bad answer from your underwriter. These rules seem onerous but are there to protect the banks from fraudulent applications.