How can I obtain a down payment for my home loan?
There are many different methods to obtain a down payment for your home. There are the standard, usual ones, but there are others that most people don’t know about but I have learned about during the many years I have been advising my clients regarding their mortgages. Basically, there are three methods - hypotheque:
A. Your own money
B. A gift from a relative
C. Funds obtained from other people or in a different way
Your own money
Using your own money is the most common way that you can come up with a down payment for a house. This is simply a part of the assets of the potential home buyer (who will own the property) that is put down for the mortgage. These assets can be in different forms:
• Savings These funds may come from a the borrower’s bank account, from selling investments (non retirement investments) or even from a bank account that is owned by a company that is owned by the borrower. (taux hypothecaire)
• RRSP If you use a HPB (Home Buyer’s Plan), a government initiative founded in 1990, you can combine it with your RSSP to create a down payment for the purchase of a home. You have to understand these regulations to see if you can qualify for such a plan - pret hypothecaire.
• Cash value of life insurance: Certain life insurance contracts have a savings component in the insurance. You can borrow an amount on the cash value of your life insurance policy and to use it as a deposit on a house - pret hypothecaire.
• Refinancing: If you own a property already, you might be able to refinance it and generate the funds for a down payment on another property purchase. In this case, the down payment is not considered a loan because it is basically your own funds that you are drawing against.
• Collateral guarantee: In certain cases, it is possible to use the equity in another property, whether or not it has a mortgage attached to it, to guarantee the purchase of another property. This is a complex procedure that effectively creates a collateral guarantee on the other property - taux hypothecaire.
The vast majority of lenders require that the down payment be in your possession for the prior 90 days. It is one of the ways that they use to comply with government requirements aimed at preventing money laundering.
All of this says that if you have your down payment in cash (under the mattress) you will risk your lender not being comfortable with your down payment.
Down payment from a gift
A gift can be given to a home buyer and s/he can use that as the down payment on a home. The gift must come from a relative. A spouse, parent, grandparent or child can make this gift. Even a gift from an aunt or uncle will qualify - hypotheque.
A gift of this nature has to be accompanied by a gift letter. This letter states that the funds being given are an unencumbered gift, not a loan of any sort.
Lenders, for the most part, will want to see that the funds are already in the bank account of the borrower, and not transferred directly from the donor to the lending bank.
Down payments from other people or sources
Besides one’s own money or assets, or a gift from a relative, there are other, less used sources for a down payment on a property:
• A bank gift: By this we mean that the bank, in the guise of a no down payment loan, is giving you a gift of a down payment. The bank will give you the 5% or less that is required for the down payment. The bank takes into account the fact that it is not your down payment, and the interest rate on the mortgage will be a little higher to reflect this - taux hypothecaire.
• A loan: There are certainproducts that are insured by the CMHC that will allow the down payment for a property to come from the proceeds of a loan. This is a rare circumstance.
• RRSP loan following an HPB: Using your HPB, you can create a small down payment for your home deposit, even if you do not have an RRSP at this time. You have to keep out the RRSP loan for 90 days and then the loan is reimbursed by the HPB. You will get a tax refund because of the RRSP contribution, and you use this refund to make the down payment on your home loan. This strategy is a bit complicated, so I would advise you to contact an RRSP loan specialist to work on it with you. You have to start the RRSP loan before February, you have to already be in negotiations for your purchase, and you have to complete the purchase by spring or early summer.
• Sales price balance: In the last few years, there has not been a lot of use of the sales price balance as a down payment tool because the market has been favorable to sellers and they do not need to offer this inducement in order to sell. It consists of the seller lending funds to the buyer. A bank will generally accept a down payment that comes from a sales price balance even though it is a loan - hypotheque.
CONCLUSION: The down payment is one of the most important conditions that a lender may have for mortgage loans. There are many strategies to obtain a minimum down payment for your mortgage. We would be very pleased to help you plan the down payment for your next purchase.
Gregory is an Accredited Mortgage Professional (AMP). To get more information on Home Loans rates - taux hypothecaire, please visit: Hypotheque | Mortgage