How can I obtain a down payment for my home loan?



There are many different ways 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 over the many years I have been advising my clients regarding their mortgages. Basically, there are three ways - 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 one's own money is the most common way that people 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 liquidating 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 Using a Home Buyer's Plan (HPB), an initiative of the Canadian government that was put into effect in 1990, a home buyer may use the RRSP to fund a down payment. You have to know the rules of this initiative and understand if and how it applies to you - pret hypothecaire.

? Life insurance cash value: Some life insurance policies have a cash value tied to them and the policy holder can borrow against this cash value and create a down payment for the purchase of a home - pret hypothecaire.

? Refinancing: It is possible to refinance a property that you already have to create a down payment on a new purchase. The down payment that comes from a refinancing is not treated as a loan since you are withdrawing assets you have in your own property.

? Collateral guarantee: It is a bit complicated, but it is possible, in certain cases, to pledge the equity in a different property (mortgaged or not) as a guarantee for the purchase of another property. It is in fact a deposit with a collateral guarantee on another property that you own - 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.

A gift as a down payment

Many times a gift is given to a potential mortgage applicant to be used as a down payment on a home. This is okay, provided the gift is from a relative. That relative can be a spouse, a parent, a grandparent, a brother or sister, a child or even an aunt or uncle - hypotheque.

This kind of a gift has to be accompanied by a ?gift letter?. This is a letter that stipulates that the money is a gift and not a loan that has to be repaid. (see this link for a blank gift letter you can use).

Most lenders will require that the gift funds are deposited into the bank account of the purchaser of the property prior to the processing of the mortgage application.

Down payments from other people or sources

A down payment that comes from another source besides the personal assets of the borrower or a gift is rather exceptional, but there are possibilities.

? A gift from the bank : This is actually a no down payment mortgage because it is the bank that gives you the 5% (or less) for the down payment. Of course, the bank has taken this into account, and the rate will be a little higher in order that the ?gift? is repaid before the end of the term of the loan - taux hypothecaire.

? Loan: Certain products that are insured by CMHC allow for the funds to come from a loan. This is a rare situation.

? RRSP loan following an HPB: This strategy allows you to have a small down payment even if you do not have any RRSP funds in your portfolio. You only have to have a RRSP loan for 90 days, which is in turn paid down by the HPB. The new RRSP contribution will yield a tax refund which can be used as a down payment. This strategy operates for those who begin the RRSP loan before February, have already entered into negotiations to buy a home and who foresee buying a house at the end of spring or the beginning of summer, at the latest. It is recommended that you to contact an RRSP loan specialist.

? 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 option 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.

What does all of this tell us? A down payment is an extremely important part of the home loan process. If you want to look at all of the possibilities open to you to get the funds for your down payment, we would be very happy to work with you to lay out a plan to obtain the funds for your down payment.