Here is a recent article I wrote for the July issue of the New Condo Guide:
Down payment, Down payment, Down payment
Much like the tenet of real estate is ‘location, location, location’, the tenet for mortgage financing is ‘down payment, down payment, down payment’. Understanding the various options available for providing a mortgage down payment is critical and could lead to significant savings, or simply being able to purchase a home that you may have believed was out of your reach.
First, a conventional mortgage requires the buyer to make a down payment of 20% or more towards the purchase price of the home. If the buyer isn’t able to put 20% down, the mortgage becomes high-ratio, which means the buyer is putting down somewhere between the minimum 5% and 20% (there are also ‘no money down’ options, but more on that below).
Down Payment Sources
Down payment sources are either referred to as ‘traditional’ or ‘non-traditional’.
Most buyers use savings or investments as the source of their down payments. Typically, lenders will require three months’ history or statements to prove the gradual accumulation of assets.
RRSP withdrawals are another common source for down payments. The government has set up the Home Buyers’ Plan (HBP) as a means for first-time homebuyers to use up to $25,000 (each) of their RRSPs as a down payment on the purchase of a home. This is essentially an interest-free loan and, as with most loans, the amount borrowed has to be repaid – 1/15th of the total amount each year. Another stipulation is that the funds have to be in the RRSP account for a minimum of 90 days.
There are a number of other rules and qualifications for the HBP, so buyers should speak with a mortgage broker to clarify the details.
Gifted down payments round out the top three sources of down payments. Lenders have specific guidelines when it comes to this source of down payment. The gift must come from an immediate family member – mom, dad, brother, etc. It has to be a gift and not a loan of any kind. Typically, a gift letter is required to confirm the funds are not part of a loan.
The non-traditional sources of down payment can be lumped together as the ‘zero’ down options. Zero down means the buyers are not using their own verifiable assets to form the down payment.
There are certain situations, such as where the buyer has significant income but simply doesn’t have funds for a down payment, where they could use borrowed funds or the ‘flex’ down program – qualifying for both the new mortgage and the credit facility providing the down payment.
Cash-back is the other significant source of non-traditional down payment. This program was set up to assist buyers using a significant amount of their saved assets to purchase a home, but who would be left with minimal resources to complete the transaction (lawyer fees, closing costs, etc). A maximum of 5% was given as a cash-back to pay for the additional cost associated with purchasing a home. The program has manifested itself into the 5% cash-back being used as the actual down payment. Essentially, this is a variation of the ‘flex’ down program, and lenders are only willing to provide this type of mortgage to borrowers with good credit and repayment history (credit scores at 650+). There are other factors to consider with a ‘zero’ down or cash-back mortgage, so again speak with a mortgage professional.
