If you are applying for a mortgage, you need to have a down payment; there’s no way around it. By law, lenders can only approve a maximum loan of 95% of the value of the home, so the rest is up to you. Mortgages with only 5% down are called “high-ratio mortgages” because the mortgage amount is almost the entire value of the home. Those are considered somewhat risky by the lender, and they require you to get insurance through the Canadian Mortgage and Housing Corporation (CMHC), Genworth, or Canadian Guaranty – which helps protect the lender in case the value of the home decreases or you cannot make your mortgage payments. However, if you have 20% or more of the home’s value as a down payment, that is called a “conventional mortgage”, and it is preferred by lenders because it reduces the total loan you require as well as some of the risk. When you have a minimum 20% down payment, you can also avoid paying the insurance premiums (in most cases). However, whether you’re down payment is 5%, 10% or 20%, you are well on your way to becoming a home-owner, though here are a few other things you need to know.
Saving up for your down payment is one option
Ideally, it’s best if you can come up with your own hard-earned money for your down payment. Lenders love this because it can demonstrate that you are financially qualified and responsible enough to purchase a home. If you’ve saved the down payment yourself, or at least a large portion of it, then it shows that you manage your finances well, thereby strengthening your application. There are lots of ways to start saving, and you can get some great information on ways to stash that cash for your down payment.
You can also be given a gift for the down payment
Lenders know how expensive homes can be, and they recognize that first-time home buyers may need a little help even just getting their 5% down payment figured out, especially with the exploding housing market lately. You may be allowed to have the full or partial amount of the down payment given to you as a gift. These “gifted down payments” come with some rules and limitations. First, the gift must come from an “arm’s length” relative, meaning a mother, father, sister, or brother (although sometimes grandparents are included). When using a gift as a down payment, it must be properly documented. A letter must be signed and dated and include the donor’s name, relationship, address and telephone number. The letter should also include the address of the property being purchased, the exact dollar amount of the gift, and proof of when the money was transferred. Finally, it must be clearly stated the money is a gift only, and that no repayment is expected. All of this is necessary for lenders to verify that the down payment money is legitimately yours; these laws are in place to avoid fraud and protect consumers. However, even if the down payment was gifted, it’s important to show the lender that you are a strong applicant for a mortgage and will be able to make your regular payments.
First-time homebuyers can access their RRSP money
The Canadian government allows you to withdraw from your RRSP without a penalty to use as a down payment. This money (up to $25,000) must be repaid back into that RRSP within 15 years. If you do choose to do this, you will have to work out the repayment plan with your financial institution that holds the RRSP, and document it each year when you file your taxes with the Canada Revenue Agency (CRA).
Getting you one step closer to owning your home
So you’ve learned a bit more about down payments, but it’s also important to note that there are still other costs that come with buying a home. It’s my job to prepare you for everything so there are no surprises. For example, you’ll need to save an additional 1.5% of the purchase price to cover closing costs – which can include land transfer taxes, legal fees, insurance, inspections, etc. By now you have realized that the mortgage process can involve a lot of paperwork and rules, but you can relax knowing that I’m here to help you sort through it! As your mortgage broker, I know the rules and regulations, and I keep up to date on any changes so that your mortgage process runs as smoothly as possible. Give me a call at 705-230-1306 if you have any questions, or would like to discuss any of your mortgage needs; I look forward to hearing from you.