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Down Payment

Putting money into piggy bank

Guidance for down payment

When a lender gives a mortgage commitment letter to an applicant, one condition that must be fulfilled in advance is the verification of a down payment to the lender.  The assets used to verify the down payment are not necessarily the assets or resources that need to be actually used at time of closing

The down payment you make on your home is important to a lender because it represents your own “skin in the game” so to speak.  The minimum down payment in Canada is 5% of the value of the home.  For borrowers putting a down-payment between 5% and 20%, they are required to pay for Mortgage Insurance from a Mortgage Insurer such as CMHC.  The insurance premium cost is tiered on the percentage level of the down payment. The less put down the higher the percentage cost.

Some programs and/or lenders will accept gifts but in most cases, it is preferred if the down payment come from the borrower’s own resources.

Confirming down payment is a requirement of our Federal government through the Anti-Money Laundering & Terrorist Financing Act through FINTRAC. There is no getting around it!

To confirm the down payment, I recommend you:

  1. Look at a snapshot of the assets today.  Determine which accounts the down payment will come from to show to the lender that a down payment can be made.
  2. Provide 90 days history of these accounts.  For example, 3 monthly print out screens or one quarterly statement.
  3. Explain any unusual deposits in the accounts greater than $3,000 (Note - in actuality this amount is subjective by lender who is reviewing it)
  • If deposits into the account came from a 3rd party such as a parent, then a “gift letter” is required based on the lender’s template.
  • If deposits came from another account, then provide a combined 3 month history of that account too and also the transaction record of the transfer.
  • If a deposit into the account came from a cash deposit such as the sale of a personal asset (i.e. a motorcycle), then the transaction must be shown such as a receipt to the buyer.  Cash deposits can be troublesome.  For example, a lender may require that the ownership of the motorcycle be shown.

Important Notes:

  • The lender must be able to see account ownership (your names listed). Sometimes printouts from online banking do not show the your name.
  • The deposit made on the home at time of purchase also counts toward the total down payment amount.
  • Cash “under the mattress” can be an issue for lenders.  It is advisable to be in a bank account to build a history.
  • RRSP Accounts – Not including the Home Buyers Plan, a lender may consider a meaningful withdrawal from RRSP’s to be subject to a withholding tax.  For example, some lenders may consider an RSP account to be at 70% of the amount.

Example to illustrate:

A couple have agreed to buy a home on August 1st for $500,000 and want to put $100,000 down (20%).  They have been approved for a $400,000 mortgage.  When they signed the purchase agreement they put down a deposit of $20,000.  Today, it is Sept 1 and the house closing day is October 1st.  They must verify down-payment as a condition of financing.

  1. Show that they have had the $20,000 deposit amount for May, June, July
  2. Show cumulatively that they have $80,000 for June, July, August.

Asset Type

How much can be used?

Note

$1,000 Cash

$0

Can’t prove its history

$10,000  Savings bank account

$10,000

3 months bank statements required

$10,000  Chequing Account

$10,000

3 months bank statements required

$10,000  RRSP Account

Depends (first time buyers vs. withholding tax).  Assume $7,000 with 30% withholding.

3 months statements required

$20,000 RRIF

$0

Locked in account is not available

$10,000 Non-registered investment account such as stocks or mutual funds

$10,000

3 months statements required

$10,000  Vehicle (or other physical asset such as comic book collection)

$0

Vehicle would need to be sold and money deposited into an account such as Chequing

$20,000 Gift from parents

$20,000

Gift letter required using the lender’s template

$10,000 Employee Share purchase plan

$10,000

Must be “vested” in the sense that they are able to withdraw the funds.  Three months statements required. 

Total

$67,000

 

Assume already proved

$20,000

 

Total proved

$87,000

 

Let’s assume that the $20,000 was already proved to come from another savings account already with its 3 month history.  The borrowers are short in the down payment requirement of $100,000 by $13,000.  In this case, they will likely need to readjust their mortgage approval amount by applying for larger mortgage amount.  One repercussion is that with a mortgage will now have a mortgage insurance premium cost attached because it’s less than 20% down payment.

 

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