The different strategies to obtain a down payment (taus hypothecaire).

The down payment is an important part of your total mortgage application. In order to access the best available rates, you have to have at least a small down payment - hypotheque.

What are the ways of obtaining a down payment?

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 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

Down payment from your own funds

The most usual form of down payment is funds that the borrower himself already has and can put down on a property. In other words, the person who is requesting the mortgage and who will own the property will supply the money for the down payment himself. This can be from various sources:

• The savings of the borrower. This money may come from a bank account, from investments that are not locked in as retirement funds, or even from a bank account a company that you own has (taux hypothecaire).

• RRSP: It is possible with the HPB (Home Buyer’s Plan) that the Canadian government initiated in 1990, to use your RRSP as a down payment for the purchase of property. It is important to know the rules of HPB to make sure you are able to use this method - pret hypothecaire.

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

• Refinancing: If you own a property already, you may 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: There is a complicated method by which you can use the equity in another property, even if it is mortgaged, to guarantee the purchase of property. In essence, a collateral guarantee on the other property is thereby created - taux hypothecaire.

Lenders, in most cases, will require that any funds used for a down payment already be in your bank account for at least 90 days prior to them being used as a down payment. They do this in order to meet the terms of government requirements designed to prevent money laundering.

What this means is that you should not be keeping your money in cash under the mattress or buried in the yard if you want to use it as a down payment for a home.

Down payment from a gift

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 explains 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 payment from other people or in another manner

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

• A gift from the bank : This is actually a no down payment home loan 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. I strongly encourage you to contact an RRSP loan specialist.

• Sales price balance : During the last few years, the real estate market has been extremely positive for sellers and properties sold so easily that down payments in the form of sales price balance practically aren’t used anymore. A sales price balance is a loan by the seller to the buyer for a certain amount which is guaranteed by a second mortgage. Most banks accept down payments which come from a sales price balance - hypotheque.

What conclusions can we draw from this? You have to treat the down payment as one of the most critical pieces of your mortgage. If you are unclear about how you can come up with a down payment, we would be happy to work with you to plan the strategy to find the funds for your down payment.

Gregory is an Accredited Mortgage Professional (AMP). To get more information on mortgage loans - prêt hypothécaire, please visit: Informezvous.com - hypothèque