Saving for a down payment is often one of the biggest challenges facing young people looking to break into the real estate market. The source of your down payment could come from your own savings, a gift from a family member, your RRSP if you’re a first time home buyer or from the proceeds of selling your current home.
No matter where your down payment comes from, one thing that is for certain is your lender will be verifying your down payment prior to full approval. It’s required by all lenders to protect against fraud and to prove that you are not borrowing your down payment, which can change your lending ratios and your ability to repay your mortgage.
DOCUMENTS YOU WILL NEED TO SHOW WHEN VERIFYING YOUR DOWN PAYMENT1. Own Savings/Investments: If you’ve saved enough money for your down payment, congratulations! What your lender will want to see is a 3 month history of any source accounts used for your down-payment such as your savings account, TFSA (Tax Free Savings Account) or Investment account.
Your statement will need to clearly show your name and your account number. Any large deposits outside of your normal contributions will need to be explained i.e. you sold your car and deposited $12,000 or you received your bonus from work. If you have transferred money from one account to another you will need to show a record of the money leaving one account and arriving in the other. The lenders want to see a paper trail of where the money came from and how it got in your account. This is mainly to combat money laundering and fraud.
2. Gifted Down Payment: Especially in the pricey Metro Vancouver and Toronto real estate markets, the bank of Mom and Dad is becoming a more popular source of down payments for young home buyers. You will need a signed gift letter from your family member that states the down-payment is indeed a gift and no repayment is required on the funds.
Be prepared to show the funds on deposit in your account no later than 15 days prior to closing. Again, the lender wants to see a transaction record. i.e. $25,000 from Mom’s account transferred to yours and a record of the $25,000 landing in your account. Documents must show account number and name.
Gifted down payments are only acceptable from immediate family members(parents, grandparents, siblings). You can learn more about gifted down payments and get a sample gift letter here.
3. Using your RRSP: If you’re a First Time Home Buyer, you may qualify to use up to $25,000 from your Registered Retirement Savings Plan (RRSP) for your down payment. To see if you qualify for the Home Buyer’s Plan to use your RRSP’s as a down payment visit here. You will need to complete a Form T1036to withdraw your funds without penalty.
Verifying your down payment from your RRSP is just like verifying from your savings/investment accounts. You will need to show a 3 month history via your account statements with your name and account number on them. Funds must have been in your account for 90 days.
4. Proceeds From Selling Your Existing Home: If your down payment is coming from the proceeds of selling your current home then you will need to show your lender a fully executed purchase and sale agreement between you and the buyer of your home. If you have an outstanding mortgage on the property, be prepared to provide an up-to-date mortgage statement as well.
5. Money From Outside Of Canada: Using funds from outside of Canada is acceptable but be prepared to have the money on deposit in a Canadian financial institution at least 30 days before your expected closing date. Verifying your down payment from overseas will also require that you provide a 90 day history of your source account.
No matter what the source is, verifying your down payment will require you to show documentation of where the money originated from and be ready to explain any large deposits. Making regular contributions into your savings or investment accounts will help develop a pattern of deposits and avoid any red flags. Don’t stockpile your cash and make large lump-sum deposits.
Most lenders will want to see that you have 1.5% of the purchase price on deposit as well to cover your closing cost. If you buy a home for $650,000 you will need a minimum of 5% down ($32,500) and another $9,750 (1.5%), for your closing cost. You will need to show a total of $42,250 available on deposit.
Thanks to Brent Sheaphard for his awesome blog this month!