If you’re hoping to buy a home sometime in the near future, odds are you’ll need to take out a mortgage to finance it.
But even though you’re borrowing money to finance the property, you’ll still need to come up with a down payment. Mortgage lenders will want to know that you are financially capable of paying your monthly mortgage payments on time and in full, and your down payment will give them some sort of reassurance that you’re good for the money. The higher the down payment, the better.
Having said that, many Canadian would-be home buyers struggle to come up with the significant funds needed to make a decent down payment. In Canada, at least a 20% down payment is needed to get approved for a conventional mortgage, though there are high-ratio mortgage options that allow for as little as 5% down. But with the high prices of real estate in many parts of the country, it can be a real challenge to come up with this money.
So, what’s a homebuyer hopeful to do when money is too tight to come up with a down payment for a home? Luckily, there are various sources of funds that can be tapped into to come up with a down payment, and that may potentially include borrowed funds.
One of the more obvious sources of money needed to make a down payment is a personal savings account. Whether this is a typical bank account, an investment account, mutual funds, GICs, or even a tax-free savings account (TFSA), your down payment can come from any one of these sources. Just make sure the money is made available by the time it’s needed.
Your RRSPs don’t have to be restricted to just your retirement days. In fact, these funds can be borrowed in order to help you buy a home.
If you’ve already saved up some money in an RRSP account, you may be eligible to use as much as $25,000 (or ($50,000 for a couple) from this account to be used as a down payment. You won’t even be taxed on this withdrawal as long as the money has been in the RRSP account for a minimum of 90 days. That money will have to be paid back, however, and you have up to 15 years to repay it and put it back into your RRSP account.
It’s becoming increasingly common for young couples who are buying their very first homes to turn to family or friends as a source of down payment funds. Young adults who are just coming from college or university are typically strapped with large student loans that can take years and even decades to pay off. In fact, student loans continue to be one of the biggest obstacles that young adults face when it comes to taking the leap into homeownership.
Many parents are able and willing to help out their children when it comes to a down payment, and luckily, lenders allow borrowers to take this money as a gift. In order to make this a legitimate financial exchange, both the borrower and the ‘gifter’ will have to sign and submit a one-page ‘gift letter’ that clearly stipulates that the money is a gift instead of a loan.
It should be noted that homebuyers are not allowed to take money from anyone who has a direct interest in the property sale, nor can the seller provide an incentive to the buyer, unless that incentive boosts the value of the property through improvements, such as new windows or a new roof.
Not all home loans allow money to be borrowed for down payments. It’s important to determine if the mortgage you’re applying for allows this before proceeding with an application. Some lenders would prefer knowing that borrowers are not overly leveraged in order to make a down payment and have their own money upfront to be put toward the property being purchased.
That said, it’s still possible to borrow money to be used towards a down payment. If you have an excellent credit score and a healthy household income, you may be eligible to borrow the funds needed for a down payment.
Sagen, (formerly Genworth Canada) one of the three big mortgage insurers in Canada (the other two being CMHC and Canada Guaranty) currently offers a program that’s specifically geared toward helping buyers who are having trouble coming up with a decent down payment. Known as the ‘Cash Equity/Borrowed Down Payment Program,’ the program is designed to help borrowers who have less than a 10% down payment to put towards their home purchase.
This program even allows you to borrow money to be used to cover closing costs (such as legal fees, land transfer taxes, taxes on the mortgage insurance premiums, etc). The money can be borrowed as long as any associated repayments are factored into the Total Debt Service (TDS) calculation.
It’s important to understand that borrowing money for a down payment will increase your debt-to-income ratio, which simply means you’ll have a lot more debt compared to the amount of income you bring in. Lenders generally like to see low debt-to-income ratios, which means borrowers are less likely to be overwhelmed with debt payments and are therefore at a lower risk of defaulting on their mortgages. If you’re planning to borrow money for a down payment, make sure you’re not overloading your debt pile in an effort to become a homeowner.
There are several sources of funds that you can tap into for a down payment, but it’s important to take the time to assess your finances and make sure that you’re financially comfortable to take on this significant investment. Speak with The Woollam Mortgage Team to help you identify what type of mortgage is right for you and what your financial obligations will be when taking on a home loan.