So do you need to hold up a bank to get a down payment? Of course you do not and if you did then you will not need a home as one will be provided – issue is you will not be able to leave this small enclosure.
All kidding aside there has been so many rule changes that it’s time to explore the options that are available in the market today.
At present, in Canada, you are required to have at least 5% as a down payment towards the purchase of a home but there are various ways and options to get this 5%. So gone are the days of the true 0 down programs as all lenders are required to confirm a client has a source for this 5% and it’s up to each lender to prove how and where these funds come from prior to closing day.
So what are the options?
First you need to see what you would qualify for as this will give you what you need in dollars. For example if you qualified for 100k then you are going to need 5k and if you need and qualify for 200k you are going to need to get 10k. So contact your mortgage broker and get yourself educated on what you can afford and what you need to do to get into your new home.
We will go through each of them here.
1 Savings – simple enough. You save so much money to accumulate what you need for your down payment and closing costs. Check out a blog I did in regards to closing costs here. This is where you need to ask yourself what can I/we afford to set aside each month. To get 5k over 12 mths you will need to set aside around $420/mth for a 100k purchase. The lender will also ask for 3 month bank statements to confirm an accumulation of funds. If there are any large deposits you will also be required to confirm where these deposits came from. With today’s life styles and expenses this seems to be one of the hardest things for a client to do but with a little discipline it is possible and the end result is home ownership. Think about setting up a Canada Savings Bond, Tax Free Savings or a separate savings account and do a direct deposit each month into it. It is the old paying yourself strategy.
2 RRSP – if you have an RRSP you can borrow these funds if you are a first time home buyer without income tax being withdrawn or the monies being added to your income. You will need to repay these funds over a period of time and there is a maximum amount you can withdraw. At the time of this writing this amount was 25k so a husband and wife could access up to 50k to be used towards a down payment. NOTE: there are exceptions to the first time home buyer qualification period. See this link to find out all the information in regards to this great program.
3 Investments – if you have mutual funds, stocks, bonds etc you can use any of these for a down payment. You will need to prove the amounts in the investments as well as show the transfer of funds from your investments into your bank account.
4 Gift – you can get a gift from an immediate family member. This means mother/father/brother/sister or grand parents. The person giving the monies will need to sign a gift letter. You will also have to show the monies being deposited into your account. There are some lenders who also require confirmation of funds from the person providing the gift. (could mean bank statements, confirmation of investments etc).
5 Borrow the Money – you are allowed to borrow your down payment but your credit has to be great. If you have a line of credit, credit card or just get a bank loan you are allowed to use these funds for the purchase of your home. We have to use the payments in your qualifying ratio guidelines which means instead of qualifying for a 250k purchase you may only qualify for a 200k purchase. You can take this one step further and get a RRSP loan. You can then apply the RRSP credit to your income and this may get you a refund when you file your taxes. The RRSP has to be at least 90 days old before you can take it out under the first time home buyer program. You will also be limited to the lender you use as you will be bound to use the lender you get the RRSP loan from. This is a great strategy but you need to know what to do so again this is where your mortgage broker will come into play.
6 Cash Back – while you still have to prove a 5% down payment up front we can still get you a cash back ranging from 1% to 5% once the deal is closed. This means if you wanted your 5% down payment back once the deal closes this is another option to turn too. The down side on this option is the rates. They are higher than your traditional rates. At the time of this writing a 5% cash back rate was in the 4.64% range while the rates not using cash back where in the 2.59-2.69% range. This is also a good option if you need some funds for your closing costs. As stated we have 1%-5% cash back and at the time of this writing the 1% cash back rate was in the 3.24% range – still a great rate.
7 Sell Something – if you have a vehicle to sell or anything tangible then you can use the monies for your down payment. You need to make sure you have paper work confirming the sale though and confirmation of it deposited into your account. This means if you get 4k for an auto ensure you make a deposit to your bank account for 4k so you have a paper trail that is not confusing. This could also be things like gold, silver etc – again just make sure you document it.
8 Cash Under the Mattress – if you have cash at home and it’s a large amount you need to deposit it into your bank account. This type of savings will only work if it has been in your account for a minimum of 90 days. So if you are looking to purchase a home and have cash in your house put it in the bank.
9 Equity From Another Property – if you have any other properties you can look to refinance these properties and take the equity out for a down payment on another home. You are allowed to borrow up to 80% of your properties value and you can use these funds for the purchase of another property.
So as you can see there are quite a few different options when dealing with the down payment dilemma. The most important thing is to talk to a mortgage broker and get all your options. I will meet and go over your whole file to find the best option for you. Buying a house is like any major thing we do in our lives. You need to have a plan to give you the best chance of achieving the best outcome for you.
As always questions and comments are encouraged.
Eric Gall is the owner of Avanti Mortgages (operating as a mortgage specialist for TMG – The Mortgage Group Atlantic). If you are purchasing, refinancing or renewing your mortgage contact Eric or check out his website and apply online.