A down payment is one of the most essential aspects of every mortgage application and new home purchase. Here are a few things to keep in mind while getting it prepared.
The Source of the Down Payment
Most home buyers are aware that they will require a certain amount of money for a down payment. What many do not realize, is that lenders are required to verify the source of the funds. This allows them to ensure that it is not coming from a source of debt, such as a line of credit or credit card. Instead, the best options for your down payment are as follows.
1. Savings Account
The first and most traditional method is your savings account; you’ve likely been saving for this your whole life!
If you are utilizing your personal savings for a down payment, lenders will require three months of bank statements. These should include your name, account number, past transactions and balance history. Any large deposits made in that time will require an explanation and supporting documentation.
2. Gifted From A Family Member
If you are fortunate enough to receive help from the Bank of Mom and Dad, there are certain requirements:
- A signed gift letter from the immediate family member
- Proof of the transfer into your bank account with the account history
- Important note: If money is being transferred from immediate family overseas, most lenders will require copies of the wire transfer and account history
3. RRSP Withdrawal
Another option for a down payment is the use of a Registered Retirement Savings Plan (RRSP); this only applies to first-time buyers. First-time buyers are allowed to borrow up to $35,000 from their RRSPs tax-free. Note, the money must be repaid within 15 years over 15 equal installments paid once per year.
How Much of a Down Payment is Required?
The minimum down payment amount required in Canada is as follows:
- 5% on the first $500,000
- 10% on $500,000 to $1 million
- 20% over $1 million
For example, on a $600,000 house you would need to put a minimum of $35,000 down ($25,000 on the first $500,000 and $10,000 for the additional $100,000).
If your down payment is less than 20% of the purchase price, you will be required to purchase mortgage loan insurance. These premiums range from 0.6% to 4.50% of the total amount of your mortgage. Using the example above, this would mean an additional $3,600 to $27,000. However, if your down payment is 20% or more, you will not be required to purchase mortgage loan insurance.
Additional Costs and Fees
Lastly, you have to consider closing costs. Closing costs are typically 1.5% to 4% of the purchase price. In order to get financing, you are required to show that you have enough to cover these costs. These funds need to remain in your bank account until they are provided to the lawyer to complete the purchase. This is because lenders will often request updated statements near the closing of the sale to ensure nothing has changed. If money has been moved around or there are new large deposits or withdrawals, they could affect the final approval.
We are always here to help guide you through the process. Make sure you are upfront about your down payment amount, and where it is coming from. This will help determine whether or not it is suitable, and allow us to find the best lender and mortgage product for you!