For most people, rummaging up the required percentage of a down payment is the most difficult part of buying a home. Particularly true for first-time home buyers who can’t rely on the earnings of a prior property sale.
For buyers having difficulty obtaining the down payment funds, it may be enticing to go to a family member for help, or if they have a line of credit or—as a last resort—a credit card for a cash advance.
Something people don’t realize is that lenders all want to know where the cash came from. Lender will constantly ask for verification.
Below is an idea of usual down payment resources for homebuyers, and the evidence lenders normally need so they can safeguard the source of funds meets lender and legal regulations.
1. Personal Savings and Investments: 33%
This is the number one source of funds for the majority of homebuyers, with one-third of them using own savings for their down payment. The savings have been built up over time and the homebuyer has sacrificed their livelihood to get a down payment.
Between savings in a Tax-Free Savings Account (TFSA) or RRSP’s and GIF’s are where the money is financed in low-risk securities, sitting until it generates enough for a home purchase.
Most lenders will require: Three calendar months of full bank accounts, showing your name, account number, deals, and entire history. Verification of large deposits into your account.
2. Gifted Down Payments from Family: 12%
With the fast rise in home prices of late, many first-time buyers have been excluded from aggressive markets across Canada. Be sure to find out how family will affect your buying power. The gifted funds cannot be a loan from your family otherwise it will need to be included in your application and will increase your debt service ratios and you may not qualify for the mortgage.
That’s where Mom and Dad come in handy to help out. If it isn’t mom and dad, it can be a close blood relation. For example, a sister, brother, wife’s parents or sister-in-law, however it cannot be a brother’s wife’s sister.
Most lenders will require: A sign-up gift letter from the direct family member aiding the funds, usually provided by the lender. You maybe required to verify the funds from their account into yours or wire transfer.
3. Loan from a Financial Institution: <15%
If family is not an option, it is possible to increase your deposit by getting a loan. However, there are guidelines about this as well.
Lenders see this as a red flag for your application namely because it is a high-interest type of financing to get down payment assistance. This can include securing a line of credit (LOC), a private loan or even taking cash from credit cards.
Most lenders will require: Be sure to have all supporting documents verifying these funds from the financial institution. Note these funds will increase your debt service ratios and you may not qualify for the mortgage.
4. RRSP Withdrawal: 13%
Registered Retirement Savings Plan (RRSP) are used by a lot of first-time home buyers. The Canadian Government requires this to be repaid within a certain timeframe (15 Years) or you will have to pay taxes on the amount utilized under the Home Buyers Plan (HBP).
First time home buyers can use up to $35,000 from their RRSP (tax-free) as long as it is paid back to their RRSP within the 15 years, in 15 equal payments. Accountants will ensure this is noted on their tax returns ($15,000 is $1,000 a year for 15 years).
Most lenders will require: Financial institutions have applications for withdrawing these funds under the Home Buyers' Plan. Lenders will need bank statements verifying the funds have been withdrawn and placed into your bank account. They may also require statements from your RRSP account to verify that the funds were part of those savings.
5. Home Sale Proceeds: 27%
For current homeowners selling their home, a down payment can come from the proceeds of the sale. The existing equity can be utilized once all payouts from the sale are taken care of.
Most lenders will require: Verification of the sale showing monies deposited into the home buyers account and possibly a Trust Ledger from the Solicitor that handled the transaction for the buyer.
You CAN’T Rely on CASH in a “Shoe Box” anymore
Back in the day people used to hide their money between their mattresses or in a shoe box. This is not acceptable today, it needs to be accounted for, otherwise the money can be looked upon as being laundered from fraudulent means.
Due to the “Money Laundering Act,” all monies need to be deposited into a bank account for at least three months. You will be expected to verify the funds from this account have been in there for a minimum of three months.
Closing Costs Needed
Most lenders also want you to have additional funds to cover closing costs related to your purchase.
Banks and lenders will want to see that you have at least 1.5% of the value of your home purchase price in the bank. This brokerage likes to err on the side of caution and suggest 2% which will include moving and incidentals for new furniture, etc. that the home buyer may need. For example, if the purchase price is $100,000 the Closing Costs would be $2,000 to cover things like land transfer taxes, CMHC and legal fees, moving and needed furniture.
2 recent years of Notice of Assessments (NOA) or Pension Statement, or Notice of Assessment to verify income and to confirm If any/no tax amounts owed to Revenue Canada, and 2 recent pay stubs verifying income amount
Proof of other income - e.g. Legal agreements to support a spousal or child support payment (Most recent T1 General/Tax Return to confirm the support payment is declared as income, supported by the most recent NOA or a 2 mont history of direct deposits showing regular support payment and a copy of the formal separation agreement)
2 Recent Year of NOA's
To verify no outstanding taxes to CRA (If amount is owed, needs to be paid and verified)
2 most recent years
Statement of Business ActivitiesT2125 tax forms for 2 most recent years
2 recent years of Financial Statements
Accountant prepared (unaudited)