In a Real Estate transaction, the level of documentation required for a mortgage in this day and age can frustrate the average buyer. It can seem endless, very nitpicky and annoying when you consider that you can purchase a vehicle with just a paystub. But there are a few reasons for the increased documentation requirements:
- Banks are mandated by the Anti-terrorism Act to make sure all funds are legally sourced. Criminal organizations are sly and they will launder their funds however they can.
- Banks and mortgage lenders are accountable to the insurers like CMHC or Genworth and their company’s investors and shareholders as well as to the OSFI, which oversees them all. If you default on your mortgage they have to be able to prove that they took every step possible to ensure you were, in fact, a solid borrower qualified for the mortgage.
But the bottom line is, if you were going to lend someone three or four hundred thousand dollars, I am pretty sure you would want to know that they could pay you back!
When the time comes for you to buckle down and start the mortgage pre-approval process, this should prepare you for what you need in order to speed it along and streamline the process. All documentation that you provide will obviously need to show your full legal name, financial institution holding said asset, account number, and all transactions into the account for the past 90 days. Deposits over $500 will have to be properly accounted for as to where they came from and why. You will have to have at least 5% to put down and an additional 1.5% for the closing costs so 6.5% all together and it is getting more common that banks and insurers want to see some savings in your account as a buffer for the unexpected.
In today’s market, here are some acceptable down payment sources and how each is to be verified. You can use a combination of them but remember that you will have to verify how you acquired the funds:
- Savings – You will need a 90-day history on the account.
- TFSA or Tax-Free Savings Account – You will need a 90-day history
- RSP- Yet again, you will need a 90-day history and verification form proving that the funds have been cashed and deposited into your account
- Gift – from an immediate family member. You will need a gift letter stating it is as such and not needing to be paid back as well as proof it has been deposited to your account
- Loan – Did you know? You can actually use borrowed funds for your down payment through certain lenders. Of course, they will need to verify the terms of the loan and if it is new to make sure you can afford both it and your mortgage.
- Credit Card/Line of Credit – Just like the loan scenario but in this case, you usually only have to prove you can afford the payments for both.
- Sell Something – You can sell anything you own but make sure you document it properly. Bill of sale, a copy of the cheque and proof it has been deposited to your account.
- Gifted Equity – If you are purchasing the home of a family member and they wish to, they can gift you the equity in the home and this can be used as the down payment.
- Inheritance – This will be verified by documents from the lawyer with the corresponding deposit to your account.
Conventional or unconventional, these are the many ways that a purchaser can fund a down payment for their home. If you ever have any questions on this topic, your Real Estate Professional or Mortgage Broker/Lender should be well equipped to handle all of your questions.