Traditional Mortgages 101: How to Verify 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.
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.
Having a Down Payment Dilemma? Consider your RRSP
Are you looking to buy your first home? Are you short on the down payment needed to qualify for a mortgage? That money you’ve been locking away into your RRSP could make the difference.
The Canadian government offers borrowers The Home Buyers’ Plan (HBP), which lets you borrow funds from an RRSP to make a down payment for your first home purchase.
How does it work?
- The home has to be your principal residence.
- You can borrow as much as $25,000 from your RRSP to go toward a home purchase.
- You have to live in Canada.
- You can’t take contributions to an RRSP out unless those contributions have been in your account for a minimum of 90 days.
- You pay no interest because you’re the one providing the money.
- You have as many as 15 years to pay back what you borrowed out of your RRSP.
Should you consider the HBP?
When you borrow from your RRSP, you’re lending money to yourself with no interest – and you have 15 years to pay it back. This is a lot less expensive than taking out a private loan to cover the difference – those offer short terms and often come with high interest rates. You can only borrow up to $25,000 – but that can often make the difference for many first-time homebuyers.
Other Things to Consider
If you’ve owned a home before, you can still be considered a first-time homebuyer. If you are trying to build or buy a qualifying dwelling for someone with a disability, or to help someone with a disability build or buy a home, then you can qualify as a first-time homebuyer. However, either you or that disabled person has to move into that home as their principal dwelling.
Are you married? Then you can borrow up to $50,000 together ($25,000 apiece). If one of you is not considered a first-time homebuyer, though, the other still can take part.
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.
This is only designed to give you basic information. If you need more information about your own situation, you should reach out to a tax accountant or an attorney. At Amansad Financial, we can give you referrals to professionals in your area – and we can make more specific suggestions about the best plan for you going forward. We have helped many people find the loans that they need, and we can help you too!