Mortgage Downpayments Explained

DOWNPAYMENTS
EXPLAINED
MORTGAGE
Jackie Woodward
Mortgage Consultant
Phone: 780-433-8412
Email: info@mortgagegirl.ca
TMG The Mortgage Group Alberta
Mortgagegirl.ca

When purchasing a home, the borrower is required to come
up with a portion of the purchase price in addition to the
mortgage which is called the downpayment. There are
multiple downpayment sources that are acceptable to most
mortgage lenders, I want to explore the most common ones.
While you can still technically buy a home with zero downpayment
funds on hand, 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.
MORTGAGE DOWNPAYMENTS EXPLAINED
Jackie Woodward 780-433-8412 info@mortgagegirl.ca

The minimum downpayment required by most mortgage lenders is
5% of the purchase price, meaning they will not finance a first
mortgage that is higher than 95% of the property purchase price.
While If you have less than a 20% downpayment, a high-ratio
mortgage insurance premium will be charged which can be added
to your mortgage. The more downpayment funds you have, the
lower the insurance premium
Keep reading for some brief details on eligible downpayment
sources as well as what kind of documentation you can
expect to be asked for as confirmation of those funds.

SAVED DOWNPAYMENT
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 90-day transaction history of
those funds, along with a paper trail for any unexplained and unusual
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proof the funds have been withdrawn from your RRSP and deposited into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.

SAVED DOWNPAYMENT
Rent-to-Owns are also viewed as being a saved downpayment as
long as the Rent-to-Own a agreement clearly outlines a set
monthly installment portion is credited towards downpayment in
addition to the market rent you have already paid.
Be aware that some lenders may also require proof of the
funds accumulating in a separate account.
As not all lenders consider Rent-to-Owns an eligible
downpayment source, you may want to work with a mortgage
professional with access to multiple lender options.

GIFTED DOWNPAYMENT
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.

GIFTED DOWNPAYMENT
If you have any questions or concerns as to whether you can meet
the gifted downpayment requirements, have a discussion 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 initially as there may be different
guidelines to be met.

GIFTED DOWNPAYMENT
Another form of accepted downpayment is a gift of equity. This
occurs when a property is being bought and sold between related
family members.
The selling party gifts a portion of the equity to the buyers as
a downpayment, meaning no cash changes hands while the
mortgage finances the rest of the home value.
These types of transactions tend to come with a few more
requirements, do ensure you find out the details upfront.

BORROWED DOWNPAYMENT
If you’re considering this option, I recommend investigating it
carefully as it can be difficult to build equity when effectively
borrowing 100% of the home value. Depending on your specific
financial situation, this option may or may not be for you.
When borrowing the downpayment funds, the new monthly
payment for that debt must then be factored into your debt
servicing. As an unsecured line of credit is most commonly
used for a borrowed downpayment, you will be asked to
provide confirmation that there are sufficient funds available
for borrowing.

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 also 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 or interest rate
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.
Talk to your mortgage professional about the specific
requirements and supporting documentation your lender will
be looking for as the closing costs can be calculated
differently depending on what province you are buying in.

FINANCED DOWNPAYMENT
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.

FINANCED DOWNPAYMENT
If you’re exploring this route, you could still be asked to show
some investment into the purchase from your own funds.
Be sure to have a preliminary chat with your mortgage
professional about how you would 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, you could have a combination
of some or all of the above.
Whatever route you’re taking to home ownership, reduce
your stress by talking with an experienced mortgage
specialist and getting a head start on the document
requirements.
You want to prevent surprises during the home buying
process when it comes to one of the most vital components
of qualifying for a mortgage to purchase a home.

Jackie Woodward
TMG The Mortgage Group Alberta
Phone: 780-433-8412
Toll Free Phone: 866-932-8412
Email: info@mortgagegirl.ca
Visit: www.mortgagegirl.ca
Follow @mortgagegirlca
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Mortgage Downpayments Explained

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