Here’s part 2 of my 10 step series on mortgages here at Financial Uproar every Wednesday. Every step of the process will be covered from the application to qualifying to tips and tricks to save money on your mortgage and everything in between. To read all of these just click on the category Mortgage Basics.
The first series of this post covered the whole application process, mostly focusing on the mountain of paperwork that the borrower is expected to provide to the lender. Unfortunately the lender doesn’t really trust the borrower and because of mortgage fraud asks for proof of just about everything the potential borrower tells them.
To get a mortgage in Canada, a borrower has to have at least 5% of the property’s value for a down payment. The lender supplies the rest of the money to pay for the house and the borrower slowly pays back the lender. To avoid CMHC insurance premiums, a borrower must put 20% of the house’s value up as a down payment.
We touched on down payments last week, mostly just mentioning that the lender requires proof of where the money is sitting and that it’s been sitting there for at least 3 months. This is the case if you’re providing your own down payment, however more and more borrowers are either borrowing the down payment or receiving it as a gift.
What Can Be Used As A Down Payment
For the most part, any money you have sitting in any account can be used as a down payment. Money in a chequing or savings account obviously can. It’s the same thing with money or even securities sitting in a brokerage account, except the securities will have to be sold. Even a borrower’s RRSP can be used, providing the borrower pays that money back in 15 years. If the borrower doesn’t, that money will be taxed. You can even use your TFSA or equity in an existing property as a down payment.
What If You Don’t Have The Cash?
The borrower has two options if they don’t have the cash available to cover the down payment. They can either borrow the money or get the money as a gift from a relative.
Borrowing the money doesn’t even have to occur at the same lending institution that the mortgage is coming from. Someone can borrow the money for the down payment from BMO and use that money to put down on a CIBC mortgage. If that person has strong enough credit to borrow upwards of $10,000-20,000 unsecured then they can be confident they’ll qualify for the mortgage they’re looking for. In fact, often banks will make these kind of loans because they get the benefit of getting the mortgage when the borrower finds a suitable property.
With the introduction of various kinds of cash back mortgages, the bank holding the mortgage can give the borrower the money back and the borrower can then use that money to repay whomever they borrowed the down payment from, another way the lender attempts to keep more business in house.
What other borrowers do is hit up family members for the money. As long as both borrower and family member sign a gift letter stating the money is a gift and there’s no expectation of repayment, the lender is happy. Very often there will be a handshake agreement between the borrower and the relative about repayment terms, but lenders like to pretend that doesn’t happen. All that needs to happen is for the money to get transferred to the buyer’s account and it’s done.
If You Don’t Have The Cash, Maybe You Should Wait
One opinion that I’m sure is shared by many others in the PF blog community is that is someone doesn’t have the financial responsibility to save up for the down payment themselves then maybe they shouldn’t be buying a house. Buying a house is a huge financial responsibility and owning one comes with all sorts of extra costs. Home ownership isn’t a right, rather it’s a responsibility that needs to be taken seriously. And to top it all off, the amount of leverage usually associated with financing a home can make even a small drop in home prices hurt. The bottom line is home ownership shouldn’t be a decision someone enters into lightly.
Saying all that, I used money earmarked for college for the down payment on my first rental property (at my parents’ blessing). I lived at home and paid it off a short time later, paving the way for my second and then my third rental houses. Getting help on the down payment is something financially literate people do as well.
There are all sorts of places a down payment can come from. Canadian lenders are extremely flexible when it comes to that part of your mortgage.