When you apply for a mortgage, one of the most important issues the bank will examine is whether you have a down payment and how much it is. Even a small one will have an impact on the loan - hypotheque.
How can I obtain a down payment for my home loan?
You can obtain a down payment in a lot of different ways. Some are fairly standard ones and others are ones you may not know about, but I have learned of over the many years I have been helping people get their mortgages. There are basically three ways - hypotheque:
-Your own funds
-A gift from a relative
-Funds obtained from other people or in a different way.
Down payment from your own funds
The most usual form of down payment is funds that the borrower himself already has and can put down on a home. In other words, the person who is requesting the mortgage and who will own the property will supply the money for the down payment himself. This can be from various sources:
• The savings of the borrower. These funds may come from a bank account, from investments that are not locked in as retirement funds, or even from a bank account a company that you own has (taux hypothecaire).
• RRSP Using a Home Buyer’s Plan (HPB), an initiative of the Canadian government that was put into effect in 1990, a home buyer may use the RRSP to fund a down payment. You have to know the regulations of this initiative and understand if and how it applies to you - pret hypothecaire.
• Life insurance cash value: There are life insurance policies that have a savings piece attached to them that permit the policy holder to borrow against the cash value of the policy. These funds can then be used as a down payment on a home - pret hypothecaire.
• Refinancing: If a potential property buyer already owns another piece of property, it may be possible to refinance that property and get additional funds from the refinancing. These funds can then be used as a down payment and they would not be considered a loan since it is the borrowers own assets being used.
• Collateral guarantee: There is a complex method by which you can use the equity in another property, even if it is mortgaged, to guarantee the purchase of property. In essence, a collateral guarantee on the other property is thereby created - taux hypothecaire.
The vast majority of lenders require that the down payment be in your possession for the prior 90 days. It is one of the methods that they use to comply with government regulations aimed at preventing money laundering.
All of this says that if you have your money in cash (under the mattress) you will risk your lender not being comfortable with your down payment.
A gift as a down payment
Many times a gift is given to a potential mortgage applicant to be used as a down payment on a home. This is okay, as long as the gift is from a relative. That relative can be a spouse, a parent, a grandparent, a brother or sister, a child or even an aunt or uncle - hypotheque.
This kind of a gift has to be accompanied by a “gift letter”. This is a letter that explains that the money is a gift and not a loan that has to be repaid. (see this link for a blank gift letter you can use).
Most lenders insist that the gift funds are deposited into the bank account of the purchaser of the property prior to the processing of the loan application.
Other kinds of down payments
Besides the above methods of your own or relatives money for a down payment, there are other less well know ways to find a down payment:
• A gift from the bank In other words, a no down payment loan. The bank is in essence giving you a gift to use as a down payment on your mortgage. Of course, the bank takes this into account, and the rate on such a loan will be a bit higher so that the bank makes sure it’s get paid back for the gift in the form of more earnings - taux hypothecaire.
• Loan There are products available under CMHC programs that permit a down payment to come from a loan. This is a rare circumstance.
• RRSP loan following an HPB: This method allows you to have a small down payment even if you do not have any RRSP funds in your assets. You only have to have a RRSP loan for 90 days, which is in turn paid down by the HPB. The new RRSP contribution will yield a tax refund which can be used as a down payment. This strategy works for those who begin the RRSP loan before February, have already entered into negotiations to buy a home and who foresee buying a house at the end of spring or the beginning of summer, at the latest. I strongly encourage you to contact an RRSP loan specialist.
•Sales price balance: The real estate market has been a “seller’s market” over the last few years, and so properties have been selling quickly. This means that a down payment in the form of a sales price balance is not a necessity these days. A sales price balance is a mechanism whereby the seller loans funds to the buyer (to encourage the purchase of the home). Banks generally accept a down payment that comes from a sales price balance. - hypotheque
What conclusions can we draw from this? You have to treat the down payment as one of the most critical pieces of your mortgage. If you are unclear about how you can come up with a down payment, we would be happy to work with you to lay out the strategy to find the funds for your down payment.
