With the recent mortgage insurance premium increase for financing over 90% of the purchase price of a home, I’m finding the downpayment options are a hot topic. You can still technically buy a home with zero downpayment funds on hand, though given the process involved I’m not convinced it’s the best idea. If you’re main goal is to build equity in your new home as quickly as possible, the more funds you have invested into the purchase initially, the better.
The minimum downpayment required to still be eligible for best interest rates is 5% of the purchase price. Keep in mind, if you have less than a 20% downpayment, a high-ratio mortgage insurance premium will be added to your mortgage amount. The more downpayment you have, the less the insurance premium is. Following are some brief details on eligible downpayment sources as well as what kind of documentation you can expect to provide as confirmation of those funds.
This describes any funds you have accumulated over time and would like to use towards your downpayment. These funds can be sitting in your bank account as savings, RRSPs or an investment account. Basically any account with your name on it where the funds have been accumulating over a period of time. You can expect to be asked to provide a 60 to 90-day transaction history of those funds along with a paper trail for any unexplained large deposits made during that period. If the funds are coming from your RRSP, you may be asked to provide proof the funds have been withdrawn from your RRSP and deposited into your bank account. Be sure to fully research if you are eligible under the First Time Home Buyers’ Plan which allows for RRSP withdrawal without as many income tax ramifications.
Rent-to-Owns also qualify as a saved downpayment as long as the Rent-to-Own Agreement clearly outlines a set monthly instalment portion credited towards downpayment in addition to the rent you have paid. Some lenders may also require proof of the funds accumulating in a separate account. As not all lenders consider Rent-to-Owns as an eligible downpayment source, in this case, you may want to work with a mortgage professional who has access to multiple lender options so you can find one that suits your needs.
An immediate family member can gift you the downpayment funds to use towards your home purchase. Your lender will request confirmation of deposit of the gifted funds into your bank account and your family member will be asked to sign a gift letter stating the funds do not need to be repaid. In some cases, the lender may ask for confirmation the gift provider has the available funds on deposit in order to give to you. If you have any questions or concerns as to whether you can meet the gifted downpayment requirements, do discuss with your mortgage professional sooner than later to determine if an exception can be made. For example, if your gifted funds are coming from someone who lives in a different country, it is especially important to disclose this to the lender as there may be different guidelines to be met.
A few weeks ago, I wrote an article on borrowing your downpayment. If you’re considering this option, I strongly recommend doing your research. Depending on your specific financial situation, this option may or may not be for you.
Borrowing the downpayment is known to lenders and insurance companies as “flex-down” which allows you to borrow your downpayment funds with the understanding they will be repaid and the regular monthly payment must then be factored into your debt servicing. A secured or unsecured line of credit is the most commonly used leverage for a borrowed downpayment and you will be asked to confirm available balance and payment amount.
As the lender is not requiring the full 5% minimum downpayment from your own resources, you will likely still be asked to show the lender you have funds in your bank account to cover the closing costs. This will be at approximately 1-1.5% of the purchase price and will include legal fees, any property tax adjustments and other miscellaneous moving expenses. For example, if your purchase price is $300,000, you need to show the lender you have at least $4500 available to cover such closing costs. In some cases, if you have a large downpayment, proof of closing costs may not be required. Talk to your mortgage professional about the specific requirements and supporting documentation your lender will be looking for to satisfy confirmation of funds available.
A less common version of a borrowed downpayment I want to mention is seller financing or a vendor-take- back mortgage. This type of financing is exactly as it sounds in that the seller agrees to take less money at closing and instead finances your downpayment or a portion thereof. It is important to be aware of the many restrictions that come with this type of financing. If you’re exploring this route, you could still be asked to show some investment into the purchase from your own funds so be sure to have a preliminary chat with your mortgage professional about how you would ideally like to structure your mortgage.
As you can see there are many eligible downpayment options and you don’t have to pick just one type as you could have a combination of some or all of the above. Whatever route you’re taking to home ownership, reduce your stress by getting a head start on the document requirements by getting information first from an experienced mortgage specialist. It will prevent surprises during the home buying process when it comes to one of the most vital components of qualifying for a mortgage.
As always, do not hesitate to contact the Mortgagegirl if you have any mortgage questions. Available over the phone at 780-433-8412 or email firstname.lastname@example.org. Stay in the loop by following on Twitter @Mortgagegirlca.