Traditional Mortgages 101: Verifying Your Down Payment
When you want to buy your first home, one of the biggest obstacles can be coming up with a down payment. Many people start out saving up money, but it can be hard to maintain that level of saving as you start out as a new family. However, you don’t have to rely on your own savings, even if you’re using a traditional or semi-traditional lender to fund your mortgage. A family member can give you the money, or you can take some money out of your RRSP account if you’re buying your first home. You can also use the proceeds from the sale of your existing home.
If you plan on taking out a mortgage from a traditional or semi-traditional lender, though, you will have to provide proof of the source of your down payment before you gain full approval of your loan. All lenders are required by law to verify where the down payment came from to keep borrowers from taking out additional loans for a down payment. This additional debt would alter your debt-to-income ratio and influence the calculations that lenders make in determining whether or not you will be able to afford your monthly mortgage payments.
What documentation will lenders request?
This varies depending on the source of your down payment. If you are taking the funds from your personal savings or investments, then you will need to provide three months of statements from your source accounts. Examples include your TFSA (Tax Free Savings Account), your personal savings account or your investment accounts. That statement needs to show your name and account number. If you have put in a large deposit within that time period, you’ll have to explain it. Maybe you sold a boat, or maybe you received an inheritance. Either way, you’ll need documentation to show where the money came from. Did you transfer money from a different account? You’ll need the paper trail for that money as well. The purpose of this is to keep borrowers from taking out loans fraudulently (and from laundering money).
If your down payment comes from a gift, you have to present a signed gift letter from the family member who gave it to you. The letter must state the amount of the gift and verify that you will not have to pay those funds back. You’ll have to deposit those funds into your bank account at least 15 business days before closing, and the lender will want a copy of the transaction record of the money leaving your family member’s account and entering yours. All statements have to show the name(s) and account number(s). Remember – you can only use a gifted down payment from a sibling, parent or grandparent.
If your down payment comes from your RRSP, you need to provide three months of statements from your account, and the statements must include your name and account number. You can take up to $25,000 from your RRSP if you are a first-time home buyer, and you have to fill out Form T1036 to take out the money without paying a penalty. The funds must have been in your RRSP for at least 90 days before you withdraw it for a down payment.
Are you bringing in money from outside Canada? Then you have to deposit the money into a Canadian financial institution no less than 30 days before your anticipated closing date. You also have to provide three months of statements from the source account outside the country, as well as the proof of deposit in a Canadian bank.
What if you’re using sale proceeds from an existing home to make your down payment? Then you must provide the lender with a purchase and sale agreement between yourself and the purchaser of your existing home, and the agreement must have been executed fully. Do you have an existing mortgage on the property? You’ll need to provide the latest statement on that mortgage as well.
Just remember – no matter where the down payment funds are coming from, you need to show verification of where the money came from, including an explanation for any big deposits. If you contribute regularly to your investment or savings accounts, that leads to fewer questions than saving up the money at home and bringing it in all at once to make a deposit. Finally, make sure that you have at least 6.5% of your purchase price on deposit – at least 5% for the down payment and 1.5% for the anticipated closing costs.