The Down Low on Down Payments

What can be used toward a down payment on a home? Silver Sickles, Gold Dragon Coins, maybe even an Imperial Credit? Well, in this galaxy the answer is simple – cash money. In short, 100% mortgage financing is a thing of the past (believe it or not it was a pretty popular option pre-2008) and you need to show that at least 5% of the purchase price came from your own resources.

So, what constitutes ‘your own resources’? To keep things simple, I have broken it down below.

1) Savings - cash in your bank account, a term deposit, high interest savings, investments, a company stock plan you can dip into, your TFSA.

2) A First Time Homebuyer’s withdrawal from your RRSP (up to $35,000 for those who qualify and funds will have to have been in the RRSP for the previous 89 days).

3) A secured credit facility like a Home Equity Line - This doesn’t count as ‘borrowed’ funds because it is secured by another property you own, but it does get included in your debts for qualification purposes.

4) Inheritance/settlement – These absolutely qualify as down payment sources but be prepared to show documentation (i.e. a will or other legal documentation, divorce paperwork).

5) Sale of an asset – If you have another property you’ve sold, or a big ticket item like a car or equipment you’ve liquidated you can use this cash towards a purchase, but again be prepared to show documentation like a bill of sale/receipts.

What if none of the above are possible?
Don’t fret – there is another way. A very (very) common option these days is a gift from an immediate family member. This is an acceptable form of down payment and is usually verified by having that family member sign a gift letter and provide proof of funds. Keep in mind that in most cases (with very few exceptions) the gift must be from immediate family. But why you ask? Lenders want to ensure that the gift is non-repayable and not a third-party loan in disguise. It all comes down to common sense, and in most cases your neighbour or best bud from college (or even your second cousin twice removed) are not going to give you that much coin without some strings attached. If there is an extenuating circumstance where a non-arms-length gift makes sense, then take the time to sit down with your bank or broker to discuss.

What is all this 90-day history of funds business?
Another important thing to note is that ALL lenders are going to ask for a history of your funds. It can be a hard request for some to digest because it can seem like a lot, and I’ve had borrowers ask me ‘what will they want next, a blood sample and DNA screen?’ To keep things in perspective, I promise it’s not the lender or your broker trying to be difficult – but rather it’s a legislated requirement that was put in place as an anti-money laundering measure, because clearly understanding where the funds came from is key to preventing fraud.
It means bad news for the Marty Byrde’s of the world who may want to take money out of Buddy’s tomb and dump it into circulation as a down payment. Or even for anyone thinking about digging cash out of their mattress and taking it straight to the lawyer or for those considering pulling funds off a credit card to use as a down payment. The 90-day history shows that the money has been in your possession as savings for at least a quarter of a year and didn’t just magically appear in your account.

Are there any other down payment sources?
One option is the Government of Canada’s First Time Home Buyer Incentive Program where new buyers can borrow up to an additional 10% of the purchase price of a home to increase the down payment amount (you must still have a traditional 5% down from your own resources or a qualifying gift).
And lastly, just to confuse things further, there is a Borrowed Down Payment product on the market that allows for the use of lines of credit, credit cards, and gifts from non-immediate family members. That said, the qualifying criteria is strict, the high ratio premium insurance rate is higher than the standard and anything you borrow needs to be included in your debt servicing. For example, let’s say you want to take $25,000 off of your credit cards as a down payment, well then the lender is going to need to include a monthly payment of anywhere from $750-$1250 which could have a major impact on how much mortgage you actually qualify for. So, while this option exists, I would suggest that it’s utilized far less than some of the other means mentioned above which, if possible, may make more financial sense as a first choice.

Questions? Let’s chat.